CH. 9: Judgment and Decision-Making

Question 1

Judgment and Decision Making

The irrationality of our decision making.

Answer 1

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

Question 2

Rational Choice Theory

Answer 2

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

Question 3

Daniel Kahneman and Amos Tversky

Answer 3

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.

Question 4

Bias

Answer 4

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.

Question 5

The Irrational Reality of Human Judgement

Answer 5

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

Question 6

Regression to the mean

Answer 6

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

Question 7

Availability bias

Answer 7

Items that are more readily available in memory are judged as having occurred more frequently.

Question 8

Conjunction fallacy

Answer 8

When people think that two events are more likely to occur together than either is as an individual event

Question 9

Representative Bias

Answer 9

Estimating the likelihood of an event by comparing it to an existing prototype that we already have in mind.

Question 10

Recency Bias

Answer 10

Belief that the most recent experience will continue

Question 11

Framing Effects

Answer 11

When people give different answers to the same problem depending on how the problem is phrased (or framed)

Question 12

Sunk-cost fallacy

Answer 12

People make decisions about a current situation based on what they have previously invested in the situation.

Question 13

Gambler’s Fallacy

Answer 13

A form of optimism bias

Question 14

The Anchoring Effect

Answer 14

Over reliance on the first piece of information

Question 15

Confirmation Bias

Answer 15

Recalling evidence that agrees with what we thought or think is true.

Question 16

Hindsight Bias

Answer 16

Looking back, the belief that what we predicted would happen is what happened. Mistaking random events for causal events. Belief the world is predictable.

Question 17

Loss Aversion

Answer 17

Bad is stronger than good

Question 18

Optimism Bias

Answer 18

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.

Question 19

Overconfidence Bias

Answer 19

Overestimating our confidence in what we think we know

Question 20

Belief Perseverance

Answer 20

Persisting in what we believe in the face of contrary evidence (e.g., Anti-vaccination, election stolen)

Question 21

System 1 and 2 thinking

Answer 21

System 1 thinking (fast thinking) - intuitive

System 2 thinking (slow thinking) - deliberative

Question 22

Fatigue

Answer 22

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

Question 23

The Decision Architect

Answer 23

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

Question 24

Dunning-Kruger Effect

Answer 24

“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