Chapter 11: Decision Making

Question 1

research on judgment and decision making?

Answer 1

-Actual human decision-making performance is often less impressive than models developed for rational behavior.
-Recent research has developed better characterization of judgments made in everyday life.

Question 2

what is the prescriptive model of judgment

Answer 2

-Model that specifies how people ought to behave to be considered rational
-Mathematically determined

Question 3

what is the descriptive model of judgment

Answer 3

-Model that states how people actually behave
-Determined by doing psychological research

Question 4

what is Baye’s theorem

Answer 4

Prescriptive model for how people should reason about probabilities as they collect relevant evidence
-Based on a mathematical analysis of the nature of probability
-You should understand this holistically – you don’t need to be able to calculate it

Question 5

how does Baye’s theorem work

Answer 5

-Combines prior probability (baseline) with condition probability (given the prior probability) and generate posterior probability
-People tend to ignore baseline probabilities (e.g. video example, 1% probability that a woman has breast cancer)

“The less likely something is before evidence, the less likely it should be after evidence”

Question 6

what are the three kinds of probability

Answer 6

prior, conditional, and posterior

Question 7

what is prior probability

Answer 7

The probability that a hypothesis is true before consideration of the evidence

Question 8

what is conditional probability

Answer 8

The probability that a particular type of evidence will be found if a particular hypothesis is true

Question 9

what is posterior probability

Answer 9

The probability that a hypothesis is true after consideration of the evidence

Question 10

what is base rate neglect

Answer 10

-People often fail to take base rates into account when making probability judgments.
-People sometimes ignore prior probabilities.
-sometimes people weigh evidence too much and ignore base rates.

Question 11

Kahneman and Tversky (1973) study about base rate neglect (lawyers and engineers)

Answer 11

Group A: 100 people: 70 engineers & 30 lawyers
Group B: 100 people: 30 engineers & 70 lawyers

Two groups of people, each group got one of these questions
-What is the probability that a random person chosen from this group is an engineer?
-70% from group A
-30% from group B

Jack is a 45 year old man. He is married and has four children. He is generally conservative, carful, and ambitious. He shows no interest in political and social issues and spends most of his free time on his many hobbies, which include home carpentry, sailing, and mathematical puzzles.
What is the probability that Jack is an engineer?
-Still 70% for group A, and still 30% for group B
-People ignore the prior probability (base rate)

When they actually did this research, they would ask people at baseline the probability and they would get this right, then would describe this person and they would say 90% and completely ignored the base rate

Question 12

how can base rate neglect decrease

Answer 12

Gigerenzer and Hoffrage (1995)
-base-rate neglect decreases if events are stated in terms of frequencies rather than in terms of probabilities
-Argued that people reason better with frequencies than with probabilities because they experience frequencies of events in daily life

ex. about women who have breast cancer given in percentages or frequencies

Probabilities: 20% solve correctly

Frequencies – 50% solve correctly, still not crazy high but a lot higher than probabilities, reason for this is because most people do not have to deal with percent or probabilities most days; frequencies are things that you deal with all the time whether you realize it or not, people are better at reasoning with frequencies because you deal with them more

Question 13

explain what people normally say to the question about words that have K in them

Answer 13

Which are there more of, words that start with the letter K or words with the letter K as the third letter?

People could figure out the answer to this question when you have a dictionary, the correct answer is third letter, but people will instinctually say the first choice is correct? Why do more people make this mistake?

Question 14

why do people make the K mistake

Answer 14

availability heuristic

Question 15

what is the availability heuristic and how does it relate to the K problem

Answer 15

People assign more importance to things that come to mind more easily
-You focus on the letter K

Spreading activation: words that have K as the first letter are more closely associated to “K” than words that have “K” as the third letter
-Thus, they receive more activation and come to mind more easily
-Easier to think of words that start with K than have K as the third letter

Ex. Shark attacks and plane crashes, because this is vivid and this is what is on the news

Question 16

size question of the two german cities

Answer 16

Which is bigger: Bamberg or Heidelberg?
-Most people only recognize Heidelberg and not Bamberg, so they assume that one is bigger; even though it might not be; people assume the name you recognize is bigger than the name you do not recognize; German students are less likely to get the answer right because they recognize both of the cities

-American students tend to pick the one they recognize
-This rule generates more correct answers than when both cities are recognized (e.g., Heidelberg vs. Munich)
-American students have much more difficulty with this because they recognize both, and have a harder time distinguishing between the two
-So we do this because it’s adaptive
-Same for availability heuristic

Question 17

what is the recognition heuristic

Answer 17

People tend to identify the most valid cues for making judgments and use these.
-If one item is recognized and another is not, people view the recognized item to have a higher value on dimensions like size.

Question 18

two more examples with the recognition heuristic with animals

Answer 18

People do this intelligently…

Are there more Hainan partridges or arctic hares?
-Recognizing both makes the answer to come by
-Most people have not heard of Hanian partridges so they say artic hares

Are there more giant pandas or mottled umbers?
-Same thing as above, but we know that pandas are endangered so there is a small quantity, so most people will guess mottled umbers since they know that pandas are endangered

Question 19

how do people make decisions surrounding certainty (money example)

Answer 19

Which would you rather have if you could only choose one?
-1 millions dollars with certainty
-2.5 million dollars if, when I flip a coin, it comes up heads

How do people make choices under uncertainty?

People should choose the alternative with the highest expected value.

von Neumann and Morgenstern (1944)
-Two choices
-A. $8 with probability of 1/3
-B. $3 with probability of 5/6

Expected value (utility)
-A. $8 x 1/3 = $2.67
-B. $3 x 5/6 = $2.50

Prescriptive models would recommend choosing A
-Most people don’t do this

Question 20

what is subjective utility

Answer 20

The value someone places on something
-The value that we place on money is not linear with the face value of the money
ex.
A. $1 million with probability of 1
B. $2.5 million with probability of .5
-$1 million x 1 = $1 million
-$2.5 million x .5 = $1.25 million

Question 21

what is the function that relates subjective value to magnitude of gain and loss

Answer 21

Graph on powerpoint that shows gains and losses graphed against value, when you have large gains the difference in those gains does not impact how much you value them/ how happy you make them (the higher you go on the curve, the value kind of plateaus out) (e.g. you would be a lot happier getting $2 than $1, but not 1million vs. 2 million)
-The same is true for losses, the lower you go on the curve, the value kind of plateaus, sometimes people use this to take advantage of you

Question 22

what are framing effects

Answer 22

People make different choices among the same alternatives, depending on the statement of the alternatives
-Most common when there is no clear basis for choice

Question 23

study about framing effects (horse races)

Answer 23

Kahneman and Tversky (1984)

You’ve lost $140 at the racetrack and have an opportunity to bet $10 on a horse that will pay 15 to 1. What you do may depend on framing (i.e, how you think about it)…

Two ways of framing it

Frame #1:
-refuse the bet – lose $140 for sure
-Make the bet – good chance at loosing $150 and a poor chance at breaking even

Frame #2:
-Refuse the bet – nothing changes
-Make the bet – good chance of loosing an additional $10 and a poor chance of gaining $140

Both of these choices are the same thing, but the choice that people make depends on the framing and how the bet is described (people are more likely to do the second frame, but not the first)

Question 24

framing example with disease outbreak and deaths

Answer 24

Imagine the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows…

Frame #1:
-Program A: 200 people are saved
-Program B: 1/3 prbability that 600 people will be saved and 2/3 probability that no people will be saved

Frame #2:
-Program C: 400 people will die
-Program D: 1/3 probability that nobody will die and a 2/3 probability that 600 people will die

People make these choices simply by how you would justify these choices after the fact, the choices mean the same thing but how you describe it influences how people make the choices (think about it in terms of the utility graph)

Question 25

what parts of the brain are related to decision making

Answer 25

basal ganglia and ventromedial prefrontal region

Question 26

basal ganglia and decision making

Answer 26

-Subjective utility of an outcome appears to be related to the activity of dopamine neurons in the basal ganglia.

BASAL GANGLIA: important for motivation
-Olds and Milner (1954) – stimulated dopamine release in rats, basal ganglia was active (responds the same way to certainty than uncertainty)

Question 27

ventromedial prefrontal region and decision making

Answer 27

Knutson et al. (2005) – basal ganglia responds to magnitude, VPR responds to probability
-Responds more to certainty in gains rather than uncertainty
-Other research shows that VPR integrates probability and magnitude

Question 28

explain the iowa gambling task and people with brain damage

Answer 28

-Normal participants eventually learn to avoid decks with higher payoff.
-Participants with ventromedial damage keep returning to high-paying decks and do not show measures of emotional engagement when selecting these decks.

Idea behind the way you do it is: you give people four decks of cards that they can choose from, there are bad and good decks (bad decks: every time you flip a card over you get 100 cards per card but lose 1250 on one of every ten cards, good decks: earn 50 but one in every ten cards you lose 250 dollars
-Seeing if people eventually learn to avoid the bad decks and pick from the good decks, despite the bigger initial payoff in the bad decks, you earn more from the good decks
-Everyone starts using the bad decks more at first, but then you get hit with big losses, people who do not have damage to the ventromedial prefrontal region will eventually switch to the good decks, people who do have the damage will never switch over from the bad decks because they do not attend to the losses