12. The Psychology of Choice

Question 1

People choose if…

Answer 1

they are told to choose

Question 2

Reducing uncertainty can be done through what two things?

Answer 2

1. Hypothesis testing
2. Prediction

Question 3

Choosing between alternatives involves what kinds of decision making?

Answer 3

Rational vs irrational decision-making

Question 4

What is meant by “rational”?

Answer 4

Selecting optimally

Question 5

What two things get optimised in normative/prescriptive models? How?

Answer 5

1. Expected value - highest resource value = object value * probability
2. Expected Utility - highest psychological value = subjective utility * probability

Question 6

What do Kahneman & Tversky (1979) mean by in the Prospect Theory by:
1. Editing
2. Evaluation

Answer 6

1. Select against a reference point via heuristics (availability, anchoring, representativeness)
2. Calculate anticipated utilities x probabilities

Question 7

What is meant by loss aversion?
- Faced with a choice leading to ____, we are risk-____, preferring a ____ expected utility with a ____ certainty
- Faced with a choice leading to ____, we are risk-____, preferring a ____ expected utility if it can avoid ____

Answer 7

• gains, risk-averse, lower, higher
• losses, risk-seeking, lower, losses

Question 8

What is meant by probability weighting?

Answer 8

People attribute excessive weight to low probability events and insufficient weight to high probability events

Question 9

What is meant by the term Pseudodiagnosticity?

Answer 9

Belief that more information about current hypothesis is the most diagnostic choice

Question 10

How does the prospect theory explain the following in the “Behavioural Economics” task:
1. Loss aversion
2. Anchoring

Answer 10

1. Choosing a low bet gives greater perceived certainty of gain, but selling a high bet gives greater perceived risk of loss
2. Precise numbers determine degree to which people value the utility of each bet

Question 11

What were the results of Ball et al?
- Classic effect of p____ r____ replicated
- No effect of t____ of b____ values –> not a____
- No effect of s____ vs g____ treatment –> not l____ a____

Answer 11

• preference reversal
• transparency, bet, anchoring
• selling, gift, loss aversion

Question 12

What do the results of Ball et al mean for the prospect theory?

Answer 12

Preference reversal may result from switching between system 1 and system 2 processes