CH. 9: Judgment and Decision-Making Flashcards
Judgment and Decision Making
The irrationality of our decision making.
Originally developed by social scientists Daniel Kahneman and Amos Tversky, cognitive bias is an umbrella term that refers to the systematic ways in which the context and framing of information influences individuals’ judgment and decision making.
People’s systematic but purportedly flawed patterns of responses to judgment and decision problems.
Behavioral Economics
Rational Choice Theory
Classical view that we make decisions by determining how likely something is to happen, judging the value of the outcome.
Daniel Kahneman and Amos Tversky showed that the rational choice theory was a poor predictor of actual human decision making.
They identified common errors in decision making and judgement.
The study of cognitive bias and faulty heuristics (process or method of thinking and problem solving) primarily invented in the 1970’s by Daniel Kahneman and Amos Tversky
Daniel Kahneman and Amos Tversky
The study of cognitive bias and faulty heuristics (process or method of thinking and problem solving) primarily invented in the 1970’s by Daniel Kahneman and Amos Tversky
They showed that the rational choice theory was a poor predictor of actual human decision making.
Bias
The confidence people have in their beliefs is not a measure of the quality of evidence but of the coherence of the story that the mind has managed to construct,” wrote Nobel-winning psychologist Daniel Kahneman in describing how internal biases shape our beliefs and encourage our own minds to mislead us.
The Irrational Reality of Human Judgement
Heuristics - methods of problem solving and making judgements, arriving at a decision, right or wrong.
Intuition based - Fast Thinking, aka Type 1 thinking
Reflection based thinking is Slow Thinking - Type 2
Regression to the mean
Small numbers of events are more likely to look nonrandom, e.g. coin tossing, small samples.
With larger numbers of repetitions the numbers will seek the mean.
Unusual events upon repetition return to their mean
Availability bias
Items that are more readily available in memory are judged as having occurred more frequently.
Conjunction fallacy
When people think that two events are more likely to occur together than either is as an individual event
Representative Bias
Estimating the likelihood of an event by comparing it to an existing prototype that we already have in mind.
Recency Bias
Belief that the most recent experience will continue
Framing Effects
When people give different answers to the same problem depending on how the problem is phrased (or framed)
Sunk-cost fallacy
People make decisions about a current situation based on what they have previously invested in the situation.
Gambler’s Fallacy
A form of optimism bias
The Anchoring Effect
Over reliance on the first piece of information
Confirmation Bias
Recalling evidence that agrees with what we thought or think is true.
Hindsight Bias
Looking back, the belief that what we predicted would happen is what happened. Mistaking random events for causal events. Belief the world is predictable.
Loss Aversion
Bad is stronger than good
Optimism Bias
Human decision making often reflects the effects of optimism bias wherein positive events are expected more than negative ones.
Earlier research findings suggest that optimism bias is greater in North Americans than in individuals from eastern cultures.
Overconfidence Bias
Overestimating our confidence in what we think we know
Belief Perseverance
Persisting in what we believe in the face of contrary evidence (e.g., Anti-vaccination, election stolen)
System 1 and 2 thinking
System 1 thinking (fast thinking) - intuitive
System 2 thinking (slow thinking) - deliberative
Fatigue
The costs of decisions
Ego Depletion - The use of physical resources to make decisions - the role of glucose
Brain consumes 20% of daily energy, typically, on average.
Fatigue introduces Type 1 thinking
–skajdhjkh–
Ego Depletion
Laziness and inertia can be more powerful than bias
Easy and fast answers = type 1 or fast thinking
The Decision Architect
Design systems to account for human bias and positively impact decision making
Thaler and Sunstein - Nudge: Improving Decisions About Health, Wealth, and Happiness
Examples: Saving for Retirement, Organ Donation
Dunning-Kruger Effect
“The fool doth think he is wise, but the wise man knows himself to be a fool.”—William Shakespeare Touchstone, in As You Like It .
Charles Darwin said, “Ignorance more frequently begets confidence than does knowledge”- in The Descent of Man in 1871
