23 - Decisions

Question 1

What is expected utility theory? (Decisions Cognitive)

Answer 1

You should make choices that have the highest subjective value for you

Question 2

What is multi-attribute theory? (Decisions Cognitive)

Answer 2

Expands on utility theory suggesting that one should weight the attributes of objects according to their importance and combine the values of each to gain overall utility

Question 3

What is economic utility theory? (Decisions Cognitive)

Answer 3

• Foundations lie in the mathematical analysis of gambling

- Organisations are regarded as rational, who make choices to maximise their expected utility

Question 4

What did Bernoulli introduce the idea of? (Decisions Cognitive)

Answer 4

The value of a fixed sum of money decreases as the amount increases

Question 5

Utility theory is an example of what? (Decisions Cognitive)

Answer 5

Normative theory

Question 6

What does a normative theory aim to do? (Decisions Cognitive)

Answer 6

Describe what should happen, on the basis of assumptions

Question 7

What does prospect theory believe? (Decisions Cognitive)

Answer 7

Outcomes should be defined in terms of gains and losses, not in terms of absolute utility levels

Question 8

What is loss aversion? (Decisions Cognitive)

Answer 8

The prospect of losing a certain amount is more aversive, than gaining the same amounts is tempting

Question 9

What can loss aversion be attributed to? (Decisions Cognitive)

Answer 9

An evolutionary adaptation

Question 10

In the four-fold pattern concept, what are the effects of high probability and gains? (Decisions Cognitive)

Answer 10

• Risk averse

- Disappointment fear

Question 11

In the four-fold pattern concept, what are the effects of high probability and losses? (Decisions Cognitive)

Answer 11

• Risk seeking

- Hope to avoid loss

Question 12

In the four-fold pattern concept, what are the effects of low probability and gains? (Decisions Cognitive)

Answer 12

• Risk seeking

- Hope for large gains

Question 13

In the four-fold pattern concept, what are the effects of low probability and losses? (Decisions Cognitive)

Answer 13

• Risk averse

- Fear of large loss

Question 14

What is the endowment effect? (Decisions Cognitive)

Answer 14

• The effect of ownership

- People demand more to give up on an object than they would be willing to pay to acquire it

Question 15

How did Kahneman et al (1990) measure the endowment effect? (Decisions Cognitive)

Answer 15

• Half P’s asked given a standard $6 mug and asked to name a selling price
• Half P’s had to bid with their own money
• Average named prices was x2 higher than the average price for buying

Question 16

When does Allais paradox concept arise? (Decisions Cognitive)

Answer 16

Inconsistencies of actual observed choices with the predictions of expected utility theory

Question 17

How does prospect theory explain Allais paradox? (Decisions Cognitive)

Answer 17

When gambles are combined, the probability of the outcome moves along the (distorted) value scale

Question 18

What is mental accounting? (Decisions Cognitive)

Answer 18

We allocate resources to different accounts and reason about gains and losses within a particular account