Decision making Flashcards
Difference between judgement and decision making
Judgement is the estimation of a probability of an outcome based on incomplete information.
Decision making entails the judgement of of various options the person is fully informed about.
Bayes theorem
is a mathematical formula that describes the probability of a certain outcome based on the probability of the components.
In order to calculate the probability the theorem multiplies the prior odds of the event happening with the likelihood ratio.
( likelihood of the event actually happening when one says it happened divided by likelihood of the event not happening when one says it happened)
Limitations of the Bayes theorem
- people often do not consider the prior odds
- even if base rate information is provided they ignore it ( when disadvantageous for them) ( confirmation bias / principle of trutz)
Expected utility theory by Neumann and Morgenstern
- Humans decide for the option with the higher expected utility.
Expected utility assessment :
Expected utility = probability of a given outcome x subjective utility of the outcome
Subjective expected utility
- theory that includes
subjectively valuated probability of a given outcome x subjective utility of the outcome
Limitations
- humans are not that rational- dont always calculate the expected utility for all decisions they make
Rational choice theory
Humans are maximisers and are always calculating a costs and benefit outcome before deciding for a choice.
–> always chose the behavior that leads to the best possible outcome. Maximise the utility!
Multi attribute utility theory Wright
perfect decision making theory :
1) defining attributes that are relavant for the decision
2) determining the weight of each attribute
3) listing all options
4) rating each option on each attribute
5) calculating the utility of each option and choosing the one with the highest outcome
Limitation:
Strategy is way too complex
Descriptive theories
The decision maker focuses on the values/ losses and gains not necessarily the final outcome.
Humans are loss averse. More concerned about possibly loosing something than possibly gaining something. ( everyone besides Shayan;)
elimination by aspect theory Tversky
people are satisficer not optimizer.
In this theory Tversky states that we eliminate all options that dont seem to fit in order to make a final decision.
E.g. buying a house : fist eliminating the too expensive ones, than the ones with bad location…
Limitation to Tversky’s theory ( elimination by aspect theory)
- when few options are available humans do mostly choose the multi attribute utility theory.
- there is no specific order in which this theory eliminates things, therefore this strategy –> might not lead to the best choice
two stage theory
a modified version of the elimination by aspect theory and the multi attribute theory.
The options get eliminated with the aspect
until only a manageable number of options are left.
prospect theory ( Kahnemann & Tversky)
- the prospect theory does entail that people do first identify their current state and than evaluate their losses and gains from their current standpoint on.
From this perspective they decide whether they gain or loose, and therefore decide for the option that has the lowest risk for loss.
People are in general loss averse.
Limitations of the prospect theory
- does not take emotion and social context into account
- it does not explain the existence loss aversion. Theories say that it might be that it was safer to not invest into risky behaviour when the current situation was stable. That risky behaviour might be more often used when starvation was a threat to the tribe.
- loss aversion occurs less often than the theory predicts
Andersons rational emotional model
The rational emotional model theory does take the emotional standpoint into account.
The outcome of an emotional situation we expect does motivate people to avoid the decision and instead use biases such as the omission bias or the status quo bias
omission bias
people prefer to not take action instead of taking action. Because they are afraid of making a mistake.
status quo bias
people prefer the current status of the situation and perceive a change as distorting . Change in the baseline is perceived as loss
Status quo bias can be tested with the help of the reverse test. Asking people for a change in one direction and another. If both is denied for no real reason, the decision makers might be stuck with the status quo bias.
recognition primed decision model
Klein determines whether a person has prior been exposed to such a situation. If this is the case the decision of the past moment is taken into account. The person considers is acting the same way would bring satisfaction to the current situation or not.
support theory
events seem to appear more or less likely depending on how directly they are phrased.
People would be more afraid to hear that they will die of an accident next week than if they just no they die next week.
Limitations:
- if the event is described too specific it becomes unlikely to the pp.
Galottis naturalistic decision making theory
The theory of naturalistic decision making by Galotti (2002) identifies 5 phases of decision making: setting the goals, gathering information, structuring the options, making a final choice and evaluating the decision
What are normative theories ?
This theory describes humans as total maximisers, which always go for the gain.
In the game ( UG ) proposers go for the smallest amount responders still agree because they only consider the gain.
Expected utility theory
Rational choice theory
