Chapter 13 - Decision Making

Question 1

In making decisions Kahneman said there were two (which) kinds of processes?

Answer 1

• unconscious and conscious

Question 2

Normative Theories

Answer 2

In an ideal world, how people SHOULD make decisions

Question 3

Descriptive Theories

Answer 3

Theories relating to how people actually do make decisions in the real world

Question 4

Base-rate information

Answer 4

the relative frequency with which an event occurs or an attribute is present in the population

Question 5

Neglecting Base Rates

Answer 5

Tendency for people to ignore the base-rate information provided to them (Kahneman & Tversky 1972) Cab study showed this - people knew that there were more green than blue cabs yet believe the witnesses accounts

Question 6

Representativeness Heuristic

Answer 6

The assumption that representative or typical members of a category are encountered most frequently

Question 7

Example of Representativeness Heuristic Impact

Answer 7

someone’s description fitting the stereotype for an occupation. Rating the likelihood of that person occupying that position is likely to be higher than it should - ignore other relevant information

Question 8

Conjunction Fallacy

Answer 8

Mistaken belief that the probability of a conjunction of two events has a higher likelihood of occurence than the likelihood of only one of them (Linda example)

Question 9

Availability Heuristic

Answer 9

The assumption that the frequencies of events can be estimated accurately by the accessibility in memory

for example likelihood of murder judged more frequent due to coverage in the media

Question 10

Do we always use the availability heuristic?

Answer 10

no - famous surname study

Question 11

Gamblers Fallacy

Answer 11

the mistaken belief that if something happens more frequently than normal during some period, then it will happen less frequently in the future, or that if something happens less frequently than normal during some period, then it will happen more frequently in the future (presumably as a means of balancing nature)

Question 12

Heuristics

Answer 12

experience-based techniques for problem solving, learning, and discovery that finds a solution which is not guaranteed to be optimal, but good enough for a given set of goals

Question 13

Planning Fallacy

Answer 13

Tendency for people and organizations to underestimate how long they will need to complete a task, even when they have experience of similar tasks over-running

Question 14

Anchoring

Answer 14

cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions.

Question 15

Clustering Illusion

Answer 15

tendency to erroneously consider the inevitable “streaks” or “clusters” arising in small samples from random distributions to be statistically significant.

Question 16

Why do we fail to use base-rate information?

Answer 16

We prefer to use information that is representative of stereotypical things, information from our own experiences (representativeness heuristic)

Question 17

Expected Utility

Answer 17

Expected utility = (probability of a given outcome) X (utility - subjective value - of the outcome)

Question 18

Example of Expected utility?

Answer 18

taking the probability and subjective value into account, i..e the lottery. We know we have a better chance of winning 1 million rather than 10 so we pick that instead.

Question 19

sunk-cost effect

Answer 19

Greater tendency to continue an endeavour once an investment in money, effort or time has been made

Question 20

Example of sunk-cost effect

Answer 20

It is common for people who have invested in company shares to hold on tight to them as the market slumps, in the desperate hope that the shares will rise in price again.

Question 21

Framing Effect

Answer 21

The influence of irrelevant aspects of a situation on decision making

Question 22

According to prospect theory when are people subject to framing effect

Answer 22

when what is at stake has real value for the decision maker

Question 23

Example of framing effect

Answer 23

1987 asian disease - Tversky & Kahneman told people that there was likely to be an outbreak in US - Prog A - 200 people saved Prog B - 33.33 % chance that 600 people saved and 66.66 % chance no one would be saved - participants mostly chose A even though on average both programs would save 200 people