9: Decision Making Flashcards
what are the 4 types of decision making?
multivariate choice, intertemporal choice, decision under uncertainty, decisions under risk
define: multivariate choice
making a decision between many different items
define: intertemporal choice
making decisions across time (eg £10 now or £20 in a week)
example: decision under uncertainty
should I take an umbrella
example: decision under risk
gambling, where you know the odds
define: expected utility
How good it feels to own that much money (subject to how much money you have)
what is prospect theory?
Outcomes considered as gains or losses with respect to a reference point, often the status quo. But as you move from the status quo, we become desensitised to gain/losses
define: endowment effect
once something belongs to you, it’s value increases beyond that when it wasn’t your
define: certainty effect
Changing something from 50-55% doesn’t have as big of an effect as changing competing from 95-100% or 0-5%
How does something being framed as a loss vs a gain affect people’s risk judgements?
people go for greater certainty for a gain and more risk for a loss
How does prospect theory explain the inverse risk taking for gains vs losses?
when you are gaining money, maybe getting £1000 vs definitely getting £500 = why take the risk, when you are maybe looking £1000 v definitely loosing £500, you’re already losing a substantial amount of money so why not take the risk
In prospect theory, which curve is steeper
loss - we are loss averse
what does loss aversion mean practically?
it feels worse to loose £1000 than gain it feels good to gain £1000
What are the 2 criticisms of prospect theory?
- limited scope
- purely descriptive
explain the limited scope of prospect theory
people’s choice of bet’s aren’t based on how they value them, they often just go with the higher likelihood of winning
