decision heuristics and mechanisms

Question 1

decision heuristics

Answer 1

Applying simple rules to simplify decisions, used most of the time under (1) uncertainty or when we (2) have incomplete information (“should I bring an umbrella? will it rain?”)

Question 2

Why is it not always a good idea to use decision heuristics?

Answer 2

Can be subjective and biassed

Question 3

Sunk cost fallacy

Answer 3

Resources that we’ve already invested into something tend to influence our decisions to stick with something even if these decisions do not increase the likelihood of a positive outcome

Question 4

Expected Utility theory (rational decision making)

Answer 4

people make decisions that maximize utility (happiness, health, money) given available information

Question 5

risk aversion

Answer 5

tendency to avoid risk (would be more disturbing to lose $100 than to win $100 - causes people to decline bets in fear of loss)

Question 6

risk aversion is dependent on ____

Answer 6

framing (either gain or loss)

Question 7

When things are framed as gains then ____

Answer 7

People avoid uncertainty (risk aversion)

Question 8

When things are framed as losses then ____

Answer 8

People seek uncertainty (risk taking)

Question 9

framing effect

Answer 9

When a choice is framed as a gain (saving lives), people employ a risk aversion strategy, when a choice is framed as a loss (losing lives), then people are more likely to take risks

Question 10

Endowment effect

Answer 10

Over-valuation of current possessions given by ownership (as soon as we have something, the value increases) - if an individual goes on a test drive with a new car, he or she is more likely to buy it due to the emotional attachment to it.

Question 11

What is one explanation for loss aversion?

Answer 11

Asymmetry in emotional prediction - when making a prediction, people often don’t take into account the coping mechanisms used to deal with adversity – people will rationalize their failures (“the salary wasn’t what I wanted anyways”)

Question 12

What pros and cons of heuristics

Answer 12

Pro = saves time
con = increases bias

Question 13

Hindsight bias

Answer 13

the tendency to overestimate our ability to have foreseen an outcome (“I knew it all along”)

Question 14

What are some limitations of the hindsight bias?

Answer 14

1. people tend to take too much risk (become overconfident in their abilities)
2. makes it hard to appreciate uncertainty

Question 15

Myside bias

Answer 15

When people evaluate evidence in a way that is biased to their own opinions (Type of confirmation bias)

Question 16

Confirmation bias

Answer 16

When people only look for information that proves their hypotheses and ignore information that might refute it

Question 17

Hiatus heuristic

Answer 17

If a customer made a purchase within the last N months, they are active, if they haven’t, they are inactive = a way for businesses to advertise to people who they know are interested in buying their items

Question 18

Recognition heuristics

Answer 18

recognition indicates higher value on particular criterion (An individual who is familiar with 2 big cities is more likely to know which one is bigger than someone who doesn’t know of one but knows that the other is big)

Question 19

fluency heuristic

Answer 19

If all choices are recognized, choose the one that is recognized faster (“take-the-first” heuristic - do the first thing that comes to mind)

Question 20

Fast and frugal decision tree

Answer 20

a simple graphical structure that categorizes objects by asking one question at a time (opposite from statistical method)