A - Decision Making

Question 1

Classical theories of decision making

Answer 1

normative - how people should make decisions
e.g. expected utility theory, subjective expected utility theory
descriptive - how humans actually make decisions
e.g. prospect theory

Question 2

Expected utility theory

Answer 2

Von Neumann and Morgenstern, 1947
people attribute values to options and calculate probability of occurrence
people are maximisers and so decision making is based on the principle that people want to maximise the expected value
choices are made by comparing expected utility values
EU = utility value of outcome added to respective probability

Question 3

Challenge to EUT

Answer 3

Simon, 1957
people are actually satisficers not maximisers
people do not weigh up the options or look at all the available information
people use heuristics to take shortcuts in judgements

Question 4

Subjective expected utility theory

Answer 4

an extension of EUT
emphasis is on humans as rational thinkers wanting to maximise outcomes
you do this by choosing the option with the highest expected utility
the expected utility of each gamble is equal to the probability of winning x the amount that can be won

Question 5

Support for SEUT

Answer 5

Lynch and Cohen, 1978
Results suggest that a product averaging and a differential-weighted product averaging provide more accurate descriptive models
This has implications for our understanding of human
helping behaviour

Question 6

Prospect theory

Answer 6

Kahneman and Tversky, 1979
for more simple prospects with monetary outcomes
do not weigh up option based on the final outcome
instead look at the weighting of gains and losses - uses heuristics
two stages - editing and evaluating
50% people would not place a bet that involved equal chance of winning £200 or losing £100
the pain of loss is greater than the pleasure of winning
with gain people should be risk-averse
with loss people should be risk-taking
decreasing impact of gains and losses as they build up

Question 7

Support for prospect theory

Answer 7

Kahneman and Tversky, 1979
participants assessed in two situations
1) choice of win £10 or win £50 OR get £30 for certain
2) choice of lose £10 or lose £50 OR lose £30 for certain
people more likely to choose gambles 2 or 3
show risk-aversion in situation A (gains)
but show risk-seeking in B (losses)

Question 8

Support for prospect theory 2

Answer 8

de Haan and van Daal, 1994
looked at risk attitudes towards years of life
increase in expected value of gamble resulted in shift from risk-seeking to risk-averse attitude
data is consistent with prospect theory

Question 9

Criticism of prospect theory

Answer 9

from psychologists

• there is no psychological explanation for this theory
• it also ignores factors such as emotion which do have an influence on decision making (also other biases in decision making)

Question 10

How does the brain compute value?

Answer 10

Knutson et al., 2005
- certain brain areas may be involved in calculating expected utility
- MPFC activation correlates with probability estimates
Tobler et al., 2006
- fMRI found higher expected values activated distinct regions of the striatum
- higher uncertainty elicited activation in lateral orbitofrontal regions
- suggests distinct coding in key reward structures of decision making parameters

Question 11

Biases that affect decisions and judgements

Answer 11

decision weights
framing effects
heuristics
bounded rationality

Question 12

Decision weights

Answer 12

humans have a general tendency to over-weight small probabilities and under-weight large probabilities
Lichtenstein et al., 1978
- pps asked to estimate likelihood of various deaths
- over-rating of rare events i.e. death by earthquake
- under-rating of common events i.e. death by heart disease
- under/over-weighting affects how we make decisions in particular of life choices

Question 13

Framing effects

Answer 13

Framing effects consistently highlighted to be one of the strongest biases in decision making - in particular they get stronger as one ages
minor cues have significant influence on decisions made
- these may not even be noticeable
- for example choices may be worded in certain ways that highlight the positive or negative of the same decision - i.e. as a loss or a gain (prospect theory highlights losses as more significant - technique was developed as part of prospect theory)
Levin et al., 1998 - different types of framing
- risky choice framing
- attribute framing
- goal framing

Question 14

Framing effects - Tversky and Kahneman, 1981

Answer 14

two groups - each with different scenario containing two options
positive options were chosen by 72% of pps in condition one (200/600 people will be saved)
dropped to 22% for condition two where same result would occur but had a negative frame (400/600 will die)

Question 15

Framing effects - Tourangeau et al., 2000

Answer 15

• pps asked one of two questions
• • to what extent do you ‘support’ the president’s plan?
• • to what extent do you ‘oppose’ the president’s plan?
• found different estimates of support
• highlights that the stance of the choice to be made affects decision

Question 16

Heuristics

Answer 16

Gigerenzer, 1997
time constraints or other constraints –> short-cuts in judgements –> helps make inferences
also used when logic or probability theories cannot help solve decision tasks
heuristics enable speed in decision making
Gigerenzer, Todd and the ABC Research Group, 1999
- simple, task-specific decision strategies that help solving judgement and decision tasks
Kahneman and Tversky, 1973
- previous knowledge, basically heuristics, in decision-making is dangerous and can lead to bad decisions

Question 17

Heuristics - specifics of what they are

Answer 17

Heuristics are rules of thumb in decision making that are:

• ecologically rational
• decision mechanisms originating from evolved psychological capacities
• fast, frugal and simple enough to operate effectively when time, knowledge, etc., may be limited
• precise enough to be modelled computationally
• powerful enough to model both good and poor reasoning

Question 18

Bounded rationality

Answer 18

idea that rationality is limited by the compliance of the decision-problem, also by cognitive limitations and the available time
so argues that rational decisions are not often possible in reality
Simon, 1955 - people are satisficers - even when intending to make rational choices
limits on rationality mean rules of thumb are often drawn upon
Galotti, 2007 - questioned pps about real decisions - found they came up with satisficing strategies

Question 19

Natural frequency hypothesis

Answer 19

Krynski and Tenebaum, 2007
- we posses causal knowledge which allows us to make very accurate judgements - humans are inherently intuitive - found evidence that causal structures in problems could lead to improved Bayesian reasoning performance
Amitani, 2015
- it is believed that people can do probabilistic reasoning successfully if probability information is given in frequencies not percentages
- Amitani challenges this because it is NOT adaptive

Question 20

Dual-process model of decision-making

Answer 20

suggests that we use both heuristics and more analytical processes in decision-making
cues lead to either heuristic judgements or analytical ones to lead to a decision
System 1 - heuristics - uses rule of thumb for decisions - these may be unconscious - rapid decisions
System 2 - analytical - uses processes laid out in normative theories - decisions may be conscious and have awareness - slower decisions
so posit that humans have a deliberative and intuitive decision-making system

Question 21

Stanovich, 1999

Answer 21

heuristics may have evolved earlier due to need for rapid decisions in survival situations

Question 22

Evans, 2008

Answer 22

analytical processes in decision-making may be linked to language, higher-order control and capacity to think hypothetically about the future

Question 23

Nudges

Answer 23

any indirect suggestion to try to achieve non-forced compliance to influence decision-making
has many real life applications
thought to be effective
- can be used in policy to replace traditional regulation to influence people’s everyday choices and behaviours

Question 24

Thaler, 2011

Answer 24

• any small feature in the environment that attracts our attention and influences our behaviour
• choice architect - anyone who influences the choices you make

Question 25

Thaler and Sustein, 2008

Answer 25

a behavioural or decision-making pattern may be the result of cognitive boundaries, biases or habits
so the pattern may be budged towards a better option by integrating insights about the very same kind of boundaries, biases and habits
these may promote a more preferred behaviour rather than obstruct it

Question 26

Potential benefits of nudges

Answer 26

cheaper alternatives
less invasive alternative
more effective in some cases
doesn't restrict freedom of choice
can operate independently from regulation - but doesn't have to

Question 27

Examples of nudging

Answer 27

The Coalitions’ ‘Nudge Unit’ - finds ways to make population insulate lofts, pay taxes and quit smoking
can help eating habits
can help encourage use of sun-cream
BMW making stairs more fun

Question 28

Nudging: eating habits

Answer 28

Aydinoglu and Krishna, 2011
labelling food as ‘small’ makes people eat more but think they are eating less

Libotte et al., 2014
larger plate does not increase total energy of the meal but leads to the addition of more vegetables

Marteau et al., 2011
many nudges try to change eating habits but they cannot be proven to be the cause of healthier life choices

Question 29

Nudging: using sun-cream

Answer 29

Hwang, Cho, Sands and Jeong, 2011
loss framed messages are effective in individuals with a high perceived susceptibility
gain framed messages are effective in individuals with a low perceived susceptibility

Question 30

Caution with nudging

Answer 30

Raihani, 2013
nudge policies have potential for great improvements but we must be morally aware of the choices given
must also be aware that the effects may be context specific