2. Bounded Rationality Flashcards
Rational decision making assumes…
- transitivity
- use of all info, obey laws of probability, Bayes’ rule
- description invariance
- logical thinking
In reality how rational are people?
They are boundedly rational, they use heuristics rather than fully rational choices
How does system 1 work?
Intuition- it’s fast, automatic, effortless and emotional
How does system 2 work?
Reasoning- it’s slow, controlled, rule governed, neutral and takes effort
Primes
Subconscious cues that influence judgment and behaviour. They work on system 1. System 2 is needed to override them
Accessibility
The ease at which thoughts come to mind, can depend on the context and how the information is presented
Base rate neglect
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
When do people stick to the base rates?
When there is no other salient info
Statistical vs causal info
- 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
How are statistical and causal base rates weighted?
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
Heuristics
Reduce complex tasks to simpler judgmental operations. In general they are useful, but they can lead to errors.
What are the three heuristics?
Representativeness
Availability
Anchoring
Representativeness
The probability that event x belongs to set y is judged on the basis of how similar x is to the stereotype of y
Availability
A frequency of probability is estimated by the ease that instances or associations can be brought to mind
Anchoring
A quantity is estimated by starting from a convenient or salient anchor and then adjusting in the appropriate directions
Conjunction fallacy
Where people place similarity over probability. E.g. 85% of people rank “Linda is a feminist bank teller” over “Linda is a bank teller”
How can incentives affect the conjunction fallacy?
People are more likely to get the “correct answer” since they slow down and use system 2
Mistakes caused by representativeness
- Insensitivity to sample size
- Law of small numbers
- Regression to the mean
Insensitivity to sample size
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
Law of small numbers
The belief that small samples ought to represent the population e.g. gamblers fallacy and hot hands fallacy
Regression to the mean
Outliers move back towards the mean. Previous results aren’t necessarily representative of future results
Anchoring
When estimating an unknown quantity where inevitably you have to start with some estimate
Anchoring index
(h-l)/(H-L)
Insufficient adjustment
Where you begin an estimate but don’t finish so you adjust but insufficiently
Anchoring as priming
Where an initial anchor evokes an image of something which biases your estimate . E.g Gandhi being an old man
Availability
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
Affect heuristic
In making judgments, people tag the affect or positive/ negative feelings induced by the event or stimulus. Feelings are accessible, estimates much less
