decision making Flashcards
what is riskless misattribute choice?
pick one choice that maximises attributes
what is intertemporal choice?
effect of time when evaluating options
what are decisions under uncertainty?
not certain about probability of outcome happening
what are decisions under risk?
know probability of outcomes
what is expected value?
sum of each possible value weighted by its value
what is subjective value?
how good something feels
what is expected utility?
increase subjective value when follow expected utility
what did kahneman & tversky (1979) discover about expected utility?
it depends on whether it is a gain or loss
who created prospect theory?
khaneman & tversky
what is reference dependence?
outcomes considered gains/losses with respect to reference point (current wealth)
what are the two risk attitudes of prospect theory?
- risk averse for gains
- risk seeking for losses
what is loss aversion?
more subjective value for losses than gains
what is the endowment effect (knetsch, 1989)?
value increases more when you take ownership of something
what is the allais’ effect (kahneman & tvsersky, 1979)?
0% to 1% chance of winning nothing is not same as 66% to 67% chance
what is the certainty effect (kahneman & tversky, 1981)?
if probability near to 100% or 0%, it is treated differently
what are non-linear probabilities (gonzalez & wu, 1999)?
changes in 5% more significant when close to 0% or 100%
what is the decision weights problem?
overestimate rare events and underestimate common events
what are the 3 problems of prospect theory?
- limited scope
- empirical failings
- purely descriptive
what does lichtenstein & slovic (1971) say about the limited scope of prospect theory?
cant explain why people value probabilities differently
what is the attraction effect?
make a different choice when an option is changed - choose dominating option
what does weber & chapman (2005) say about the empirical failings of prospect theory?
equally likely to choose risky options and non-risky options when low probabilities
what is an issue with prospect theory being purely descriptive?
where do curves come from?
what do stewart et al (2006) say about prospect theory being purely descriptive?
same cognitive process with gains and losses as economic environment follows pattern of of gains and losses - forms the curves
