MAKING DECISIONS CLPS 0220

adding options

- adding options is like adding time => more time you give someone to do a task, the less likely it is for them to get it done - account for procrastination

the deliberative system (dual sys. of learning)

- analytic: abstraction plus rule application - agents assumed to be conscious of deliberative processing and this enables rule following -requires effort -takes time -may be related to "secondary" emotions: regret, frustration, etc.

monty-hall (three doors) problem

- majority of people will not switch doors when a goat is revealed behind one door - in reality the probability of getting the prize increases if they do switch

satisficers

- stop searching when main criteria are satisfied -happier

choice and satisfaction trends

-as options increase, selection decreases -as options increase, satisfaction decreases

maximizers

-attempt to find best possible option -tend to search larger option set -process can be open ended -tend to be less happy and have more regret

risk neutral

-dont care about the outcome certainty, just the the utility of the outcome - U(medium) = 0.5U(small) + 0.5U(large)

paradox fo choice

-freedom of choice=>tyranny of choice

the sure thing principle

-if X is preferred to Y knowing that event A is obtained, and if X is preferred to Y knowing that A did not obtain , then X should be preferred to Y even when its not known whether A is obtained -e.g. if you're login to drink red wine when it is raining and you are going to drink it when it isn't raining, then there is no reason to check if its raining outside

power of a story

-narrative structure is persuasive -provide reasons

intuition (dual sys. of reasoning)

-non-analytic -agents are conscious of intuitive responses but not intuitive processing and not rule following -automatic -takes less time -may be related to 'primary'/reactive emotions: disgust, joy, outrage=> "gut feeling"

association availability

-people asses the frequency of a class or the probability of an event by the ease at which instances or occurrences can be brought to mind - we tend to rely on information that is readily available in memory but fail to discount value of that information -recent events are judged to be more frequent - high;y imaginable events judged to be more probable - salient objects are judged to be more frequent -easy to pronounce stock yield more profit

compromise effect

-people like the one in the middle -use extremes and people will use those as a reference point

transaction utility (utility of shopping)

-perceived value of the deal -difference between reference point and the amount paid

asymmetric dominance

-presence of dominant alternative gives people a reason to chose one over the other -whether there is relation of dominance, that dominance gives us a reason -e.g. microwave example

jam study

-set up: customers allowed to sample a variety of jams and given a a dollar off if they purchase a jar -test: 2 groups: low choice group: 6 high choice group: 24 -results: large group brought in bigger crowd but approx. same # of jars were purchased as small group

reinforcement learning

-use trial-and-error to learn about the world, then use what was learned to help guide preferences and decisions

framing (continued)

-we tend to present things in the way that we wish people to behave -this creates a huge moral issue e.g. radiation therapist gives mortality frame & surgeon gives survival frame

utilities of shopping

1. acquisition utility 2. transaction utility

satisfying (SAT)

1. alternative considered one at a time, in the order they occur 2. compare the values pf each attribute of the alternative to its cutoff level 3. if any attribute is below cutoff, reject option 4. choose first option whose attributes satisfy cutoffs 5. if no option passes, relax cutoffs and repeat

how can hindsight bias be reduced?

1. asking participants to explain the outcome that didn't happen 2. generating supporting reasons has little effect on probability judgement, generating contradicting reasons has pronounced negative effects

problems with gambler's fallacy

1. chance is not self-correcting, random events have no memory 2. we impose causality on correlation 3. we see structure in the absence of correlation

explanations for preference reversals

1. choice: high probability of winning used as justification 2. compatibility hypothesis: weight of an attribute enhanced by its compatibility with price

attributes of choice strategies

1. compensatory vs non-compensatory -trade-off attributes or not -require effort and cause conflict (compensatory) 2. selective vs non-selective information processing 3. quantitative vs qualitative reasoning -matter of degree

the value function

1. defined as losses and gains 2. concave gains; convex losses 3. steeper for losses than gains

lexiographic ordering (LEX)

1. determine most important attribute and examine values of all alternative on that attribute 2. alternatives with the best value on the attribute chosen 3. of one alternative is remaining, you're done, otherwise determine second most important attribute and go from there

implications of loss aversion

1. easier to accept a surcharge than forgo a discount e.g. taking money from teachers with poor student performance more effective than giving them money for improvement of student performance 2. size of loss aversion dependent on what you're talking about

reason based choice

1. enriched options 2. impoverish options -appeal to reason not utility or any other theories -has to be justifiable to ourselves and others

examples of normative theories

1. expected utility theory 2.

physicians & most people vs weather forecasters

1. experience 2. repetitive 3. feedback

why do superstitions arise?

1. filling in waiting time 2. script to prepare mind and body for action 3. belief in hidden agent controlling affairs 4. need to explain events

prospect theory

1. framing and editing 2. evaluation

deferring choice because of conflict

1. low conflict - easier for people to make decisions 2. high conflict -harder for people to make decisions and will delay to make decision easier later on

How do we judge probability?

1. mental stimulation 2. cold calculation 3. rough calculation 4. heuristics

preference reveals understanding utility

1. people know their values directly - e.g. multiplication table -e.g. " I cal them as they are" 2. values exist. they are perceived an reported as best hey can be -e.g. body temperature -e.g. " I call them as I see them" 3. values constructed during process of elicitation. preference is constructive, context dependent process -"they aint nothing till i call them"

weighted additive rule (WADD)

1. put each tribute on a common scale 2. weight each attribute according to importance and how it trades off with the other alternatives 3. for each option, multiply each value by weight 4. utility of option set to sum 5. must assume independence 6. not descriptive

more choices => miserable

1. real: opportunity cost 2. psychological: regret and anticipated regret 3. escalation of expectations (more choice=> we expect more)

3 types of risk utility curves

1. risk aversion 2. risk seeking 3. risk neutrality

eliminating-by-aspects (EBA)

1. same as LEX but most important attribute chosen probabilistically 2. all alternatives with values below the cutoff on that attribute is eliminated 3. if more than on alternative remains, choose next important attribute

equal weight heuristic (EQW)

1. same as WADD but each attribute given equal weight 2. requires a common scale for all attribute values -e.g. salary=1, time=1, prestige=1

principles of hedonic framing

1. segregate gains -segregate small gains from larger losses 2. integrate losses - integrate smaller losses with larger gains

reasons for overconfidence

1. tendency to focus on supporting reasons 2. ambiguity aversion

dual systems of reasoning

1. the deliberative system 2. intuition

frequency of bad and good features (FRQ)

1. use cutoffs to separate good from bad values on each attribute 2. count # of good and bad attributes for each alternative 3. choose alternative with most good attributes

components of decisions

1. value (preferences) 2. uncertainty (belief)

case-study approach

Ben Franklin -advantage: easy to explain and justify; easier to identify what is important to you -disadvantage: do people have access to their own reasons?

bayes rule

P(E1 | E2) = P(E2 | E1) x P(E1) / P(E2)

risk aversion

CONCAVE - made in the domain of gains -comparing and outcome (medium) to an uncertain outcome (small vs large) - U(medium) > 0.5U(small) + 0.5U(large)

risk seeking

CONVEX - made in the domain of losses - puts more utility on large outcomes - winning medium doesn't mean s much - U(medium) < 0.5U(small) + 0.5U(large)

independence

P(A and B) = P(A) x P(B)

conjunction rule

P(A) > P(A and B)

conditional probability

P(A|B) = P(A and B) / P(B)

sample space

a collection of primitive events such that on of them must occur

categorical imperative (immanuel kent)

act only according to that maxim whereby you can, at the same time, will that is should become a universal law

probability

assignment of numbers between [0,1] to propositions representing degree of uncertainty

Pascal's theory

because the rewards and costs are so high for believing in God, it does not matter what the probability of God actual existing is => you should believe in God

superstition

belief that two independent events are dependent despite knowing they are independent

conjunction fallacy

cases where people's probability estimates violate the conjunction rule

habit heuristic

choose what you chose last time

conjunction fallacy

choosing P(Linda is a feminist and a bank teller) > P(Linda is a bank teller)

decision

choosing to do one thing from a set of options were you could have done something else

paradox of choice

conventional wisdom deliberation > intuition

sunk cost

cost that has already been incurred and cannot be recovered

moral dumbfounding (Hadit)

dogmatic insistence on a moral judgement for which no good reasons can be given -e.g. brother and sister traveling together

hedonic framing

evaluating joint outcomes to maximize utility

impoverished option (reason based choice)

has average attributes

enriched option (reason based choice)

has good and bad attributes

qualities of a nudge

libertarian paternalistic manipulates architecture of choice to create desirable outcomes

descriptive theory

how people actually behave

normative theory

how people ought to behave

recognition heuristic

if one of two objects is recognized and the other is not then infer that the recognized object has higher value with respect to criterion

disjunction effect

immediate decisions prevented by an uncertain, but irrelevant, future event

hindsight bias

inclination, after event has occurred, that the event was predictable despite having no or little objective bias for predicting it

acquisition utility (utility of shopping)

measure the value of a good obtained relative to its price

rational analysis of choice

more choice should be good for a rational agent ad they increase the chances of getting greater utility

payment depreciation

more you pay for something the more you will wear them

human sentalism

mortal or ethical sentiments are intrinsically motivating

failed nudge example

nudge: making parents pay every minute they are late to pick up kids from daycare goal: trying to lower the number of kids getting picked up late result: more parents showed up late because guilt they felt by showing us late was dissolved by their payment

endowment effect

owning something gives it more worth

payment decoupling

payment is separated rom consumption so perceived cost of activity is reduced

ambiguity aversion

people like to bet in domains where they are confident and if they are not, they will leave it up to chance

judgment by stimulation

people often judge events they can mentally "simulate" to be more likely

anchoring and adjustment

people often make insufficient estimates by starting at an initial value an adjusting to yield a final answer

planning fallacy

people overwhelmingly underestimate time and costs of their own projects

proximity heuristic

people use judgements of closeness (distance) to estimate risks and probabilities

greatest happiness principle (John Stewart Mill)

precursor to expected utility theory

libertarian

preserve freedom of choice

representativeness

probability that object A belongs to class B originates from process B, is evaluated by degrees to which A resembles B

topical account

relates consequences of possible choices to a reference level that is determined by context

veil of ignorance (john rawls)

resources, positions, and rights should be distributed in society as if you don't know your status, capacities, or interests

paternalistic

steer people's choices in directions that promote their own welfare

proposition

string of symbols that is either true or false e.g. it will rain tomorrow e.g. this coin will come up heads

events

subset of a sample space

gambler's fallacy

the belief that a particular outcome is due if it hasn't occurred in a while

mental accounting

the implicit methods individuals use to code and evaluate financial outcomes

framing effects

the way in which an event, problem or question is worded to produce swayed results

lesson of expectations

what matters to satisfaction is whether experience meets expectations or not

rationality

when descriptive and normative theories converge

money pump

when you violate the transitivity axiom (don't follow expected utility theory)