2. Bounded Rationality

Question 1

Rational decision making assumes…

Answer 1

• transitivity
• use of all info, obey laws of probability, Bayes’ rule
• description invariance
• logical thinking

Question 2

In reality how rational are people?

Answer 2

They are boundedly rational, they use heuristics rather than fully rational choices

Question 3

How does system 1 work?

Answer 3

Intuition- it’s fast, automatic, effortless and emotional

Question 4

How does system 2 work?

Answer 4

Reasoning- it’s slow, controlled, rule governed, neutral and takes effort

Question 5

Primes

Answer 5

Subconscious cues that influence judgment and behaviour. They work on system 1. System 2 is needed to override them

Question 6

Accessibility

Answer 6

The ease at which thoughts come to mind, can depend on the context and how the information is presented

Question 7

Base rate neglect

Answer 7

Often system 1 reacts to the descriptive emotional side of the information and ignores the base rate. System 2 is needed to appreciate the base rate

Question 8

When do people stick to the base rates?

Answer 8

When there is no other salient info

Question 9

Statistical vs causal info

Answer 9

• stats- 85% of cabs are green, 15% are blue

* causal- the two companies have the same number of cars but the greens are involved in 85% of crashes

Question 10

How are statistical and causal base rates weighted?

Answer 10

Stats are generally underweighted and causal base rates are overweighted since info about the individual is accessible and we apply this to the whole population

Question 11

Heuristics

Answer 11

Reduce complex tasks to simpler judgmental operations. In general they are useful, but they can lead to errors.

Question 12

What are the three heuristics?

Answer 12

Representativeness
Availability
Anchoring

Question 13

Representativeness

Answer 13

The probability that event x belongs to set y is judged on the basis of how similar x is to the stereotype of y

Question 14

Availability

Answer 14

A frequency of probability is estimated by the ease that instances or associations can be brought to mind

Question 15

Anchoring

Answer 15

A quantity is estimated by starting from a convenient or salient anchor and then adjusting in the appropriate directions

Question 16

Conjunction fallacy

Answer 16

Where people place similarity over probability. E.g. 85% of people rank “Linda is a feminist bank teller” over “Linda is a bank teller”

Question 17

How can incentives affect the conjunction fallacy?

Answer 17

People are more likely to get the “correct answer” since they slow down and use system 2

Question 18

Mistakes caused by representativeness

Answer 18

1. Insensitivity to sample size
2. Law of small numbers
3. Regression to the mean

Question 19

Insensitivity to sample size

Answer 19

People assess the likelihood of a sample result by asking how similar it is to the properties of the population from which the sample is drawn

Question 20

Law of small numbers

Answer 20

The belief that small samples ought to represent the population e.g. gamblers fallacy and hot hands fallacy

Question 21

Regression to the mean

Answer 21

Outliers move back towards the mean. Previous results aren’t necessarily representative of future results

Question 22

Anchoring

Answer 22

When estimating an unknown quantity where inevitably you have to start with some estimate

Question 23

Anchoring index

Answer 23

(h-l)/(H-L)

Question 24

Insufficient adjustment

Answer 24

Where you begin an estimate but don’t finish so you adjust but insufficiently

Question 25

Anchoring as priming

Answer 25

Where an initial anchor evokes an image of something which biases your estimate . E.g Gandhi being an old man

Question 26

Availability

Answer 26

Where you assess the frequency of a class or the probability of an event by the ease with which instances or occurances can be brought to mind

Question 27

Affect heuristic

Answer 27

In making judgments, people tag the affect or positive/ negative feelings induced by the event or stimulus. Feelings are accessible, estimates much less