decision making

Question 1

3 diff ways decision operates

Answer 1

timescale - can make a decision on a fast action - jump or go around, or on large timescale - what school to go to

importance - how detrimental to my life is the decision x

topic - could be about what route to take home, who to hang out with

Question 2

rational choice theory says we should __ when faced two options

Answer 2

multiply each possible outcome value times the prob it would happen

75% of win 200
25% of win 0

(.75 x 200) + (.25 x 0) = $150

and pick the option with largest Expected Value

Question 3

expected value refers to the

Answer 3

average outcome of a scenario if repeated many items. Calculated based on diff possible values of outcomes and their probabilities

Question 4

advantages of using rational choice theory

Answer 4

Clear recipe to make the ‘correct’ decision

Do it consistently you will maximize monetary gains

Also if you use this your decisions will stay consistent - not be scammed

Question 5

disadvantages of using rational choice theory

Answer 5

Isn’t so clear how to apply this in Non Monetary situations (value isn’t clear)

Larger issue is if you observe how ppl make choices, doesn’t line up with this theory

Question 6

prospect theory focuses on how people make choices in the real world
they decide based on

Answer 6

Subjective Utility - not subjected value

Subjective Decision Weights - instead of objective probabilities

Relative Outcomes - comparing diff possible outcomes and thinking about them in relative terms

Question 7

what is diminishing marginal utility

Answer 7

Diminishing Marginal Utility - as stated value goes UP its subjective utility doesn’t increase as quickly it starts to level off
If we are thinking 5 vs 10 dollars, may see 10 as twice as much, but if i compare 10 mil and 5 mil they seem more similar - relative difference between them in SU is not as great

Question 8

what is subjective utility

Answer 8

aren’t thinking of these options in terms of stated values, its like our minds take these values and convert them into a subjective internal worth aka Utility, how useful we think that thing would be to us.

Question 9

loss aversion

Answer 9

losses loom larger than gains

losing 20$ feels worse than winning 20$, doesn’t align with rational choice theory, but that is not how people treat it,

Question 10

2 factors of the form of utility function - graph

Answer 10

line is not straight, as objective value increases the worth of SU does not go up at same rate - loses momentum

the function is steeper on the loss side because we see loss as more detrimental than gains - loss aversion

Question 11

how do we see probabilities in subjective utility theory

what is this called

Answer 11

Subjective Decision Weight

tend to overweight small probabilities,

for example 1% as being a lot more than 0% whereas,
51% is about the same as 50% - even though in both cases it is only a diff of 1%, likewise we underweight large probabilities, 99% feels like a lot less than 100%, whereas 50 vs 51 seems like no difference