Class 9: Decision Making Flashcards
What is bounded rationality?
Bounded rationality is a concept introduced by Herbert A. Simon, which suggests that human decision-making is limited by the cognitive capacity of the decision-maker and the information available to them. It posits that individuals make decisions based on a limited understanding of the situation and their own cognitive constraints, rather than perfect rationality.
True or false? Perception is reference-dependent.
True! The perceived attributes of a focal stimulus reflect the contrast between that stimulus and a context of prior and concurrent stimuli. The reference value to which current stimulation is compared also reflects the history of adaptation to prior stimulation.
How is AI being used in the financial industry?
AI is being used in the financial industry for a variety of applications, including fraud detection, risk management, algorithmic trading, and customer service. AI algorithms can analyze large amounts of financial data quickly and accurately, enabling financial institutions to make better decisions and improve their services.
In the Article ‘A Perspective on Judgment and Choice’, What did Tversky and Kahneman restrict the definition of framing effects to?
Discrepancies between choice problems that decision-makers, upon reflection, consider effectively identical.
How is accessibility of thought determined?
Accessibility is determined by the characteristics of the cognitive mechanisms that produce the thought in conjunction with the characteristics of the stimuli and events that evoke it.
What does the “rose-tinted spectacles” view of the past refer to?
The phenomenon that we tend to more easily and quickly recollect good decisions, rather than poor decisions.
according to kahneman 2003, what is a core property of intuitive thoughts?
they come to mind spontaneously and effortlessly, under the appropriate circumstances
What is the difference between the representativeness heuristic and the base rate fallacy? a) The representativeness heuristic is a cognitive shortcut that involves making decisions based on stereotypes, while the base rate fallacy involves ignoring general information about a population in favor of individual case-specific information. b) The representativeness heuristic involves making decisions based on probability, while the base rate fallacy involves ignoring probability in favor of anecdotal evidence. c) The representativeness heuristic involves making decisions based on the similarity between a particular case and a stereotype or prototype, while the base rate fallacy involves ignoring the overall frequency or probability of a particular event or group.
c) The representativeness heuristic involves making decisions based on the similarity between a particular case and a stereotype or prototype, while the base rate fallacy involves ignoring the overall frequency or probability of a particular event or group. The representativeness heuristic can be useful, but can also lead to errors if the similarity between a case and a prototype is given too much weight. The base rate fallacy can lead to errors if the overall frequency or probability of a particular event or group is ignored in favor of individual case-specific information.
Accessibility is
The ease or effort at which mental content comes to mind
What is transitivity?
Transitivity is the transference of an opinion (e.g. I prefer A to B and B to C, therefore I prefer A to C)
Fill in the blank The experimental evidence shows that most people reject a gamble with even chances to win and lose unless the possible win is at least _ the size of the possible loss
Twice
What does the term “loss aversion” refer to?
a phenomenon where losses are perceived as psychologically or emotionally more severe than an equivalent gains.
What does prospect theory suggest?
people do not always make rational decisions based on maximizing expected utility, but instead make decisions based on subjective perceptions of gains and losses relative to a reference point,, rather than in absolute terms.
____________ is a cognitive bias that describes people’s tendency to overvalue the likelihood of a small probability of an event to occur.
The possibility effect
What is an example of attribute substitution?
Let’s say you’re trying to decide which type of pizza to order. You know you like pepperoni pizza, but you need to figure out which toppings would be best. In this case, you might use attribute substitution by assessing the pizza’s overall tastiness based on a related heuristic attribute that is more easily accessible in your mind, such as the restaurant’s reputation. You may assume that a highly-rated pizza restaurant will make a delicious pepperoni pizza, even though the restaurant’s overall rating may not be a direct measure of the pizza’s taste. This heuristic attribute of restaurant reputation becomes a substitute for the more complex and specific attribute of pizza toppings, which may require more effort to evaluate. By using this attribute substitution, you simplify the decision-making process and make a quick judgment based on a related, more easily accessible attribute.
What are some of the key heuristics and biases that the paper discusses as examples of how human judgment can be influenced by factors outside of rational decision making?
availability heuristic, the representativeness heuristic, confirmation bias, and loss aversion (the tendency to weigh losses more heavily than gains).
True / False : Framing effects are only restricted to desicion making.
FALSE
What is the difference between satisficing and optimizing, and how do they relate to bounded rationality?
Satisficing involves finding a satisfactory solution that is good enough, while optimizing aims to find the best solution possible, with bounded rationality favoring the former.
How can we test for System 1 or System 2 cognitive processes?
Since System 2 processes require effort and System 1 processes do not, coupled with the fact that we have limited mental capacities, we can disrupt System 2 processes by having participants do 2 mentally demanding tasks at the same time
What does transitivity mean in rational decision making?
If a rational decision maker prefers A to B and B to C then they should prefer A to C.
In Kahneman & Tversky early studies, what two related concepts were their research in Intuitive Judgment and Decision-Making based on?
Accessibility (ease of which thoughts came to mind) and Distinction between Effortless Intuition & Deliberate Reasoning.
Fill in the blank: Loss aversion contributed to ______ bias.
Status-quo bias! Kahneman (2003) stated, “The reference point is usually the status quo, the properties of alternative options are evaluated as advantages or disadvantages relative to the current situation, and the disadvantages of the alternatives loom larger than their advantages”.
True or False: The article argues that individuals have a limited capacity to process information, and are prone to cognitive biases and heuristics that can lead to suboptimal decisions.
True. This is one of the key arguments made in the article, which is based on the concept of “bounded rationality.”
What is the framing effect?
The framing effect is a phenomenon where people’s decisions and judgments are influenced by the way information is presented or framed. For example, people may be more likely to choose a product that is described as 90% fat-free than one that is described as 10% fat, even though the descriptions are equivalent.
According to Kahneman and Frederick define what is attribute substitution?
A judgement is said to be mediated by a heuristic when the individual assesses a specific target attribute of a judgement object by substituting a related heuristic attribute that comes more readily to mind.
What is the endowment effect?
The maximum value that people pay to acquire a good is commonly much less than the minimum amount they would demand to get rid of it once they own it.
This is a demonstration of what? A familiar demonstration involves three buckets of water of different temperatures, arranged from cold on the left to hot on the right, with tepid in the middle. In the adapting phase, the left and right hands are immersed in cold and hot water, respectively. The initially intense sensations of cold and heat gradually wane. When both hands are then immersed in the middle bucket, the experience is heat in the left hand and cold in the right hand.
Prospect Theory
What is the formula for maximising expected utility?
U(O11) x P(S1) + U(O12) x P(S2) = Where O11 = A1 x S1, 012 = A1 x S2
In what ways do people’s emotional states and contextual factors influence their choices and judgments?
People’s emotional states and contextual factors can influence their choices and judgments in a variety of ways. For example, people may be more risk-averse when they are in a negative emotional state, or they may be more likely to choose a default option when they are pressed for time. Contextual factors such as the presentation of information or the social norms of a particular situation can also influence people’s decisions.
As palmer’s view,enhance the accessibility of changes and differences are one of the general property of ______.
perceptual systems
What is meant by bounded rationality?
Limited decision-making capacity
True or False: Heuristics are mental shortcuts that often lead to irrational decisions.
Answer: False Explanation: Heuristics are indeed mental shortcuts that people use to simplify complex decision-making processes. However, they do not always lead to irrational decisions. In many cases, heuristics can result in efficient and accurate judgments. The problem arises when heuristics are applied inappropriately or when they lead to systematic biases, which can then result in suboptimal or irrational decisions. Kahneman (2003) provides several examples of heuristics and their potential biases, such as the availability heuristic and the representativeness heuristic.
True or False: In his lecture on decision making, Tangen argues that we make decisions based on the most objective information available to us.
Answer: False
When one prefers A over B, B over C, and so also prefers A over C, this is calledÉ?
Transitivity
TRUE or FALSW: Attribute substitution allows people to make accurate judgments and rely less on heuristics or cognitive shortcuts.
False. Attribute substitution often leads to biased decision-making, as individuals replace complex judgments with more accessible ones, essentially relying on heuristics or cognitive for mental shortcuts.
What is the possibility effect?
As soon as something is remotely possible, we weight its extremely small probability disproportionately more than it deserves.
What is the main difference between expected value theory and expected utility theory?
Expected value theory focuses on the mathematical average of possible outcomes, while expected utility theory takes into account the psychological aspects and diminishing marginal utility of wealth or other outcomes.
Define Narrow framing
Narrow framing is a cognitive bias where individuals view problems/decisions in isolation, without considering the brader context or consequences, leading to suboptimal decision-making.
What is meant by natural assessment?
Attributes that are routinely and automatically registered by the perceptual system with minimal effort.
What is the affect heuristic ?
The affect heuristic is a mental shortcut that people use to make judgments and decisions based on their emotional reactions or feelings towards a particular stimulus
There are two important psychological caveats in the Expected Utility Theory. What are they?
- The utility of money declines with increasing gains. 2. This utility depends on the amount of money a person already has.
What are some implications of bounded rationality?
Biases, heuristics, and loss aversion
Invariance
refers to the idea that our choices should not be influenced by irrelevant factors such as the way a problem is presented or framed
True or False: According to Kahneman, the best way to overcome the limitations of bounded rationality is to rely solely on logic and reason when making decisions.
False. While logic and reason are important tools for decision-making, Kahneman notes that they are not always sufficient to overcome the limitations of bounded rationality. Instead, he suggests a variety of strategies, such as breaking complex decisions into smaller parts and seeking out diverse perspectives, to help improve decision-making.
What is denominator neglect?
Denominator neglect is a cognitive bias in which people focus on the numerator (the quantity or frequency of an event) and ignore the denominator (the base rate or total number of opportunities for the event to occur). In other words, people tend to make judgments based on the frequency of an event without considering the overall context or probability of that event.
What is the term used by Kahneman to describe the cognitive process in which we make judgments or decisions based on our intuitive, automatic, and emotional thinking, rather than engaging in deliberate, analytical thinking?
System 1 thinking
True or False: Confirmation bias occurs when people actively seek out information that confirms their pre-existing beliefs and ignore information that contradicts them.
True. Confirmation bias is a tendency to search for, interpret, and remember information in a way that confirms pre-existing beliefs or hypotheses. People are more likely to seek out information that supports their beliefs and ignore information that contradicts them.
What attributes are unconsciously processed by System 1?
size, distance, loudness, similarity, whether A causes B or B causes A (causal propensity), how surprising something is, affective valence, and mood
True or False: Restricted rationality means that people’s ability to make decisions is not limited by their cognitive abilities or information processing.
False. Bounded rationality means that people’s ability to make decisions is limited by their cognitive abilities, information processing constraints, and the complexity of the task at hand.
True or False: According to Kahneman (2003), System 1 and System 2 are two separate cognitive systems that influence decision-making processes.
Answer: True Explanation: In the article, Kahneman (2003) introduces the dual-process theory, which posits that there are two cognitive systems at work in human judgment and decision-making: System 1 and System 2. System 1 is characterized by fast, intuitive, and automatic thinking, while System 2 involves slow, analytical, and deliberate reasoning. Both systems play a role in the decision-making process, with System 1 often providing the initial intuitive response and System 2 being responsible for monitoring and adjusting the judgments made by System 1 when necessary. This interplay between the two systems can help to explain some of the biases and cognitive limitations observed in human decision-making.
What were the main findings of the study regarding the acceptance of humorous advertising in different cultures?
The main findings of the study suggest that there are significant differences in the acceptance of humorous advertising across different cultures, and that the use of humor in advertising should be tailored to the cultural context.
In the Linda Problem, what two occupations (the main focus) are participants asked to compare the likelihood of Linda having?
A bank teller and feminist bank teller.
Are decisions and responses based on System 2 more accurate than System 1?
Not always! Skilled decision-makers or experts often do better when they trust their intuitions than when they engage in a detailed analysis, for example, a nurse recognising subtle signs of heart disease or a master chess-player intuitively knowing the best move.
What does the affect heuristic refer to?
The idea that emotions/emotional assessments can be significant determinants of our judgements, behaviours and evaluations.
What were Pascal and Fermat’s defintion of rational choice
A choice that maximized the expected value of the decision maker
certainty effect
soon as something is probable rather than certain we weight its extremely large probability disproportionately less than it deserves
What is Prototype Heuristics roughly described as in the text?
The substitution of an average for a sum.
What is the significance of Kahneman’s work on bounded rationality?
Kahneman’s work on bounded rationality has provided insights into how people make decisions in real-world situations, and has challenged traditional economic models that assume perfect rationality. It has also had practical implications for fields such as public policy and marketing.
True or false: Perception is reference-dependent?
True! Kahneman (2003) stated, “The perceived attributes of a focal stimulus reflect the contrast between that stimulus and a context of prior and concurrent stimuli”.
According to Kahneman’s article, what is the difference between System 1 and System 2 thinking? A) System 1 thinking is conscious and deliberate, while System 2 thinking is automatic and intuitive. B) System 1 thinking is automatic and intuitive, while System 2 thinking is conscious and deliberate. C) There is no difference between System 1 and System 2 thinking.
Answer: B
What is an example of a cognitive bias discussed in Kahneman’s article? A) The availability heuristic B) The sunk cost fallacy C) Both A and B
Answer: C
Doubt is a phenomenon for which system?
System 2
How could the availability heuristic affect prospect theory?
It could change the perceived frequency of a good or bad outcome, thus changing the probability to pick them.
What are the 3 cognitive features of Prospect theory?
’- Certainty: certainty of gains/loss - Isolation effects: when people focus on differences between options rather than similarities - Loss of aversion: when an individual’s fear of losses is greater than their job of gains
What research method did the authors use to investigate the acceptance of humorous advertising across cultures?
The authors used a cross-cultural survey method to investigate the acceptance of humorous advertising across cultures.
What would appear more favourable to a patient: a) You have a 50% chance of survival. b) You have a 50% chance of mortality.
You have a 50% chance of survival.
What does the “Affect heuristic” involve?
Every stimulus evokes an affective evaluation, wheter the evaluation is conscious or not.
How can emotions influence decision-making?
Emotions can influence decision-making by shaping our preferences, priorities, and evaluations of outcomes.
How did Tversky and Kahneman’s research challenge the statistical intuitions of experienced researchers?
Tversky and Kahneman’s research found that the intuitive statistical judgments of experienced researchers did not conform to statistical principles, particularly with regards to the effects of sample size. This highlighted the persistent discrepancies between statistical intuition and statistical knowledge.
Fill in the blank. When pressed, people doing a mentally demanding activity are more likely to ________________
Blurt out whatever comes to mind
Who is Daniel Kahneman?
Daniel Kahneman is a psychologist and Nobel laureate who is known for his work on behavioral economics and decision-making.
True or False: Kahneman proposes that people rely on a system of thinking he calls “System 1,” which is fast, intuitive, and emotional.
True. According to Kahneman, System 1 thinking is automatic, rapid, and often emotional, while “System 2” thinking is slower, more deliberate, and more logical.
What is the peak-end rule?
Peak-end rule is a cognitive bias that suggest people judge a experience that is based on its most intense point (which is the peak) and its end, rather than the overall experience.
True/False The accessibility of a thought is determined only by the characteristics of the stimuli and events that evoke it
FALSE
What is the basic principle of framing?
The passive acceptance of formulation given
TRUE OR FALSE: The possibility effect is when as soon as something is probable, rather than certain, we weight its extremely large possibility less than ‘it deserves’
False - this is the certainty effect
What is the main concept introduced by Kahneman in the paper?
The main concept is bounded rationality, which refers to limitations in human decision-making due to cognitive constraints.
How does the reference point in Prospect Theory affect decision-making?
The reference point in Prospect Theory is the starting point from which people evaluate potential gains and losses. People tend to be risk-averse when evaluating potential gains relative to the reference point, and risk-seeking when evaluating potential losses relative to the reference point.
True or False: Natural Assessments are registered by the perceptual system or by System 2 with intention and/or effort.
False - Tversky and Kahneman (1983) explain the natural assessments are routinely and automatically registered by System 1 without intention or effort.
What is prospect theory and how does it challenge the traditional economic theory of rational decision-making?
Prospect theory proposes that people’s decisions are influenced by the perceived value of potential gains and losses, and that they tend to be risk-averse when facing gains, but risk-seeking when facing losses. This challenges the traditional economic theory of rational decision-making, which assumes that individuals always make choices that maximize their expected utility.
(True/false)The present analysis of judgment implies that statistical training does not eradicate intuitive heuristics such as availability or representativeness but only enables people to avoid some biases under favorable circumstances
TRUE
What is the endowment effect?
A good is worth more when it is considered as something that could be lost or given up than when it is evaluated as a potential gain.
The key notion of the current intuitive judgements and preferences analysis is __? A,Accessibility B,Framing Effects C, Prospect Theory
A,Accessibility
T/F: Kahneman (2003) suggests that humans tend to rely heavily on System 2 thinking when making decisions.
False
True or false: Utility theory uses a linear function.
False. According to utility theory, utility has a curvilinear function.
True or false: when responding to a task, the functions of System 2 are inhibited if an individual is required to concurrently perform another demanding mental task.
True.
What is accessibility?
Accessibility is the case (or effort) with which particular mental contents come to mind.
What are the Five Determinants of Accessibility?
Stimulus salience, selective attention, specific training, associative activation, and priming.
________ is a descriptive model of decision-making that suggests individuals evaluate outcomes as gains or losses relative to a reference point and are more sensitive to losses than gains.
Prospect Theory
What is the definition of invariance, and why is it an essential aspect of the concept of rationality held in economic theory?
Invariance is a key concept in economic theory that refers to the idea that a rational decision-maker should not be influenced by irrelevant changes in the way a decision problem is presented. It is essential because it helps ensure that decisions are consistent and not affected by extraneous factors that do not affect the underlying tradeoffs involved.
How are the operations of System 2 defined?
The operations of System 2 are defined as being slower, serial, effortful, more likely to be consciously monitored and deliberately controlled.
What are the two types of test of Prototype Heuristics outlined in the Kahneman (2003) article?
Tests of Monotonicity, and tests of Extension Neglect.
Which of the following best describes the concept of bounded rationality discussed in the paper? A. The idea that humans always make fully rational decisions based on complete information. B. The notion that cognitive biases and heuristics play no role in human decision-making processes. C. The proposal that humans have limitations in their ability to process information and make fully rational decisions. D. The belief that all decisions made by individuals are always suboptimal.
C. The proposal that humans have limitations in their ability to process information and make fully rational decisions.
How can we decide whether a decision is good or bad?
A study by Yates, Vienott & Patalano (2003) asked people what made good decisions good ones and they found that good decisions rated higher on the quality dimensions than bad ones. Good decisions resulted in better outcomes and that is the essence of how they were measured as either good or bad.
According to Kahneman’s research, what is the impact of cognitive biases on our judgments and choices?
Cognitive biases can lead to systematic errors in our judgments and choices, causing us to deviate from rational decision-making and make suboptimal choices.
What is denominator neglect?
Denominator neglect is when an individual focuses their attention on the numerator and the potential for success with it rather than looking at the denominator and the chance it could fail.
Which two related concepts are reviewed in the context of early studies of intuitive judgment and decision-making conducted with Amos Tversky? a) Availability and rationality b) Heuristics and biases c) Accessibility and deliberation d) Intuition and percepts
b) Heuristics and biases
What is the role of heuristics in decision-making?
They allow for quick decision-making, but can lead to biases and errors
True or False: according to the study done by Yates et al. (2003) as explained in the decision-making lecture video, good decisions ranked higher on the quality dimension compared to bad decisions.
True. The good decisions were rated at an average of 3.6, while the bad decisions were rated at an average of -2.4, with good decisions being further than the neutral point and overall rating higher than bad decisions being bad.
What is the name of the effect when we over estimate the value of a result becoming an absolute certainty. For example going from 98% to 100%
The certainty effect - going from 98%-100% is perceived higher than going from 40%-42% even though they are both only a 2% increase.
Why is it that when people are presented with two options that ultimately lead to the same outcome, they are more likely to go for the “certain option”?
This is because outcomes that are certain are overweighted relative to outcomes of high or intermediate probability.
What is the name of the assumption that preferences are not affected by variations of irrelevant features of options or outcomes?
Extensionality and invariance
