Choice Guest Lecture Flashcards
heuristic
mental shortcut or rule of thumb that can be used to get a quick and mostly accurate response in some situations but may lead to errors in others
bias
systematically inaccurate choices that don’t reflect a current situation
3 categories of biases
- Biases that affect how we interpret information
- Biases that affect how we judge frequency (how often something happens)
- Biases that affect how we make predictions
availability heuristic
The easier it is to remember something, the more likely you’ll think it is to happen in the future
what heuristic can explain why people are afraid of flying but not driving
the availability heuristic
representativeness heuristic
Tend to make inferences on the basis that small samples resemble the larger population they were drawn from
the representativeness heuristic is related to ___
stereotypes, schemas, and other pre-existing knowledge structures
how do people base their judgments of group members?
based on similarity
what kinds of biases does the representativeness heuristic result in
base-rate neglect & conjunction fallacy
base-rate neglect
When you fail to use information about the prior probability of an event to judge the likelihood of an event
application of base-rate neglect
Important for doctors diagnosing with low incidence populations
conjunction fallacy
The false belief that the conjunction of two conditions is more likely than either single condition
example of the conjunction fallacy
Linda the feminist Bank Teller
anchoring and adjustment heuristic
Judgments are too heavily influenced by initial values. People start off with one value and adjust accordingly from there
application of anchoring and adjustment in psychology
Important when getting ratings from a scale
regression to the mean
When a process is somewhat random (weak correlation), extreme values will be closer to the mean (less extreme) when measured a second time
regression to the mean is related to
- illusionary correlations
- our understanding of the roles of reward and punishment in learning
bounded rational
we are limited by both environmental and individual constraints
satisficers
look for solutions that are good enough
bounded rationality in humans
people are both bounded rational and satisficers
who proposed ecological rationality?
Gigerenzer
ecological rationality
Sees heuristics not as good enough approaches to solving a problem, but as the optimal approach
does ecological rationality distinguish between descriptivism and prescriptivism?
While previous views on heuristics draw a separation between how we should act and how we do act ecological rationality doesn’t distinguish these two
heuristics vs. optimization according to ecological rationality
Given the right environment, a heuristic can be better than optimization or other complex strategies
perceptual decision-making
objective, externally defined criterion for making your choice
value-based decision-making
subjective, internally-defined criterion for making your choice
risk
taking an action despite the outcome being uncertain
risk is specific to what kind of decision-making
value-based decision-making
ambiguity
when you have incomplete information about the consequences
what are most people’s risk attitude profile
risk-averse
harmful examples of risk-taking
- Stagnant living
- Addiction and impulsivity
how are risks framed?
as gains and losses
risk premium
the difference between the expected gains of a risky option and a certain option
risk averse
the decision maker has a positive risk premium (Need a chance at winning a lot more than a certain option to select the risky option)
risk-neutral
the decision maker has zero risk premium (no difference in the options)
risk-seeking
the decision maker has a negative risk premium (doesn’t need the chance at winning more than the certain option to gamble)
3 risk attitude profiles
- risk-seeking
- risk-averse
- risk-neutral
are risk preferences irrational
no
what theories account for individuals’ risk preferences
Classic (rational) economic theories (Expected Utility Theory)
what theories account for individuals’ inconsistent preferences
behavioural economics, the framing effect, and prospect theory
the framing effect
Inconsistent risk preferences depend on the framing (loss vs. gains) of the problem
when are people risk-averse according to the framing effect?
when the options are described as gains
when are people risk-seeking according to the framing effect?
when the options are described as losses
framing effect study (Gachter et al., 2009)
- 93% of students signed up early when they were told they would pay a penalty fee
- But only 67% signed up early when they would get a discount
endowment effect
Once ownership is established, people are averse to giving it up
what theory is described as the birth of behavioural economics?
prospect theory
2 major contributions to prospect theory
- Shape of the utility function (losses vs. gains)
- Shape of probability weighting function (unlikely vs. likely events)
prospect theory
Describes how people do act, not how they should act
utility
subjective value assigned to an object
is utility consistent?
no it’s context-dependent
how is utility typically assigned?
as a function of someone’s current state (reference point) and not in absolute value
utility function
describes how people map money to satisfaction
shape of the utility function
Asymmetrical: steeper for losses than gains. $1 lost hurts more than one dollar earning
extremity of events and perceived probability
- Unlikely events are overestimated
- Likely events are underestimated
high probability of losses results in
risk-seeking behaviour
low probability of losses results in
risk-averse behaviour
high probability of gains results in
risk-averse behaviour
low probability of gains results in
risk-seeking behaviour
dual process theory
It is thought that there are two systems for making decisions
system 1
fast, effortless, automatic, intuitive, emotional
system 1 relies on
heuristics & biases
system 1 neural mechanism,
the limbic system
system 2
slow, deliberative, effortful, explicit, logical
system 2 relies on
Rational choice
neural mechanism behind system 2
Frontal cortex
why are risks sometimes described as feelings?
Increased amygdala activity for chosen safe outcomes for gains and chosen risky outcomes for losses suggests that an emotional response may underlie the framing affect
assessing risk & emotion
There were higher estimates of death frequency when people were in a negative mood compared to a positive mood
prediction error
The difference between what you predicted would happen and what actually happened
prediction error is responsible for
learning (especially reinforcement learning)
positive prediction error
unexpectedly good outcome
negative prediction error
unexpectedly bad outcome
how does positive prediction error effect affect
increases positive affect
how does negative prediction error effect affect
increases negative affect
emotion & risky decision-making
Changes in mood predict risky decision making
When people are happy, they are more likely to gamble
how is risk preference determined in the utility function?
Deviations from the reference point
when do biases occur?
when heuristics are over-applied
availability heuristic and political parties
both Democrats & Republicans think the electoral maps work against their party
illusory correlations
Linking two co-occurring events and assuming a relationship
when do illusory correlations often occur?
when outcomes are overemphasized
anchoring and adjustment heuristic and the UN experiment
Participants were given a random number between 0 and 100 and asked if this number was higher or lower than the percentage of African nations in the UN. Those who were given a high random number gave great percent estimates than those given a low random number. this demonstrates that we even anchor estimates to unrelated information
gambler’s fallacy
The false belief that a predicted outcome of an independent event depends on past outcomes
real-world examples of the gambler’s fallacy
- U.S. judges in refugee asylum cases are more likely to deny asylum after granting asylum to the previous applicant
- Loan officers are more likely to deny a loan application after approving the previous application
- People continue to invest after several losses on the stock market
the hot hand beleif
Thinking that a person who experiences success will keep having success
the hot hand belief and basketball
Asked basketball fans about players’ shooting abilities. 91% of fans thought that a player is more likely to make a shot after taking 2 shots than after missing a shot
optimism bias
People overestimate the number of predicted positive events and underestimate the likelihood of negative events
optimism bias in depression patients
This optimism bias wasn’t present in depression patients. Presentation differs with the degree of depression
heuristics function
making intuitive and rapid judgments
overapplication of heuristics can lead to
serious errors in our judgments and reasoning (ex. Stereotyping & Gambling addictions)
post-mortem technique
learning from failures
pre-mortem technique
anticipate and prevent our mistakes before they result in catastrophe
challenges and the availability heuristic
We can remember challenges we had to overcome better than other people’s challenges. We perceive things as harder for us compared to others
