Choice and Risk Study Guide

Question 1

What is Bounded rationality?

Answer 1

logical thought is limited when individuals
make decisions, so we have to use heuristics.
These heuristics helps us find a good enough response; this is because we are satisficer

Question 2

What is ecological rationality?

Answer 2

that states that heuristics are actually the best approach to solve many complex tasks (best bang for your buck).

It is not about being good enough, but optimizing responses for the environment

Question 3

What are perceptual
and value-based decision?

Answer 3

which separates along external and internal evaluation for making your choice

Question 4

Studies have found that surprising positive outcomes (prediction errors) lead to what?

Answer 4

lead to positive mood and then lead to more risk behaviors (like gambling). This is because there was something good + surprising that occurred.

Question 5

What is Prospect theory?

Answer 5

It states that the estimations of events occurring is subjective and consists of a
utility function, how we treat losses and gains, and a probability function,

that we tend to estimate unlikely events as occurring more often than they do and likely events are occurring less.

This theory tries to explain how people engage in risk. What is important about this theory is that it states we make risks based on specific situation (how it framed as potential gains or losses) and not in absolute terms.

Question 6

What is the Fourfold Pattern?

Answer 6

predicts certain scenarios in which people are going to be risk-averse or not. Specifically, when faced with a risky outcome, people will be:

(1) risk-seeking over low-probability gains,

(2) risk-averse over high-probability gains,

(3) riskaverse over low-probability losses and
(4) risk-seeking over high-probability losses.