9. Decision-making Flashcards
Decision-making
identifying, evaluating and choosing between alternatives
Decision-making
Economical decisions:
Classical decision theory
Macroeconomics
Assumes a “rational human” is fully informed about options and outcomes, rational regarding the final choice and always searching profit maximization.
Decision-making
Economical decisions:
Expected utility theory
Microeconomics
Assumes people seek to maximize positive utility (pleasure) and minimize negative one (pain)
Decision-making
Economical decisions:
Dan Ariely
Effect of the middle price
Of three options we are more likely to choose the middle price one because it seems like a good compromise, even if it may not be the perfect option for us
Decision-making
Economical decisions:
Game theory
Behavioural economics
Study of mathematical models of conflict and cooperation between intelligent rational decision-maker
Decision-making
Economical decisions:
Game theory tests
- Prisoner’s dilemma (if A betrays B, then x years in prison…)
- Ultimatum game (lineex trust game, no maximization of profit, irrationality of decision-making)
- Public goods game (when people allowed to punish non-contributers, contributions go up)
Judgement and thinking:
Satisficing theory
H. Simon
search for an acceptable answer, rather than for an optimal one
Judgement and thinking:
Prospect theory
Tversky and Khaneman
Evaluation is relative to reference point rather than being absolute.
The perceived attributes of a focal stimulus reflect the contrast between that stimulus and a context of prior and concurrent stimuli.
Judgement and thinking:
Prospect theory:
Gains and Losses
We tend to care more about avoiding losses than we do about gaining the same amount. Losing $100 hurts more than gaining $100 feels good.
Judgement and thinking:
Prospect theory:
Value function
Our emotions about gains and losses are not the same. We get less excited as gains get bigger, and losses feel worse as they get bigger. So, a small gain might make us really happy, but a large gain won’t make us as happy as we might expect. Similarly, a small loss might upset us a lot, but a bigger loss won’t make us feel much worse.
Judgement and thinking:
Prospect theory:
Risk-averse and risk-seeking
We’re often afraid of taking risks when it comes to gaining something. We prefer to play it safe and take a sure gain over a risky chance for a bigger gain. However, when it comes to avoiding losses, we become more willing to take risks. We might take a chance to avoid a big loss, even if it means we could end up losing even more.
Judgement and thinking:
Prospect theory:
Framing effects
How choices are presented to us can also affect our decisions. Sometimes, the way a choice is worded or framed can make us more or less likely to take risks. We might be more cautious if a choice is presented in terms of gains, and more willing to take risks if it’s presented in terms of avoiding losses.
Judgement and thinking:
Regret Theory
Loomes and Sugden
we try to minimize the anticipated feelings of regret of our decisions
Boundaries of intuitive thinking
Ability to avoid errors of intuitive judgement is impaired by:
- time pressure
- concurrent involvements in other cognitive tasks
- performing tasks in the evening for “morning people” and viceversa
- mood
Boundaries of intuitive thinking
System 2 and errors
Monitoring of system 2 will detect a potential error and an effort will be made to correct it
- Facility of system 2 is + correlated with intelligence, the “need for cognition” and exposure to statistical thinking
