Decision - Making

Question 1

What are Heuristics?

Answer 1

Mental short-cuts that allow us to skip careful deliberation to draw an
inference

Question 2

Explain system 1 and system 2 in the dual processing theory:

Answer 2

System 1: Fast-Heuristics Based (Easy automatic)

System 2: Slow - logical analysis (effortful, non-automatic)

Question 3

What is the Availability Heuristic?

Answer 3

A heuristic in which we estimate the probability of an event based on
the ease at which it can be brought to mind

Question 4

What is the Affect heuristic?

Answer 4

The tendency to overestimate the risk of an event that generates strong
emotional response

Question 5

What is the Representativeness Heuristic?

Answer 5

Use stereotypes to assume what groups someone is apart of (even if it conflicts with the raw data)

Question 6

What is Base Rate Neglect?

Answer 6

When you fail to use information about the prior probability of an event to judge the likelihood of an event

Question 7

What is the Conjunction Fallacy?

Answer 7

False belief that the conjunction of two conditions is more likely than either single condition

Question 8

What is Anchoring?

Answer 8

The tendency for people to overweight initial information when making decisions

Question 9

What is Regression toward the mean?

Answer 9

When a process is somewhat random (i.e. weak correlation), extreme values will be closer to the mean (i.e. less extreme) when measured a second time

Question 10

What is the Bounded rational theory on why we use heuristics?

Answer 10

The theory that humans are rational relative to environmental constraints (e.g. time
pressure) and individual constraints (e.g. working memory, attention)

• Under this view
• People are Satisficers: we look for solutions that are “good enough”
• “Making do” with the limitations we have as humans
• Although heuristics sometimes provide incorrect answers and lead to biases; they also work

Question 11

What is the Ecological rationality theory of why we use heuristics?

Answer 11

heuristics not as a “good enough”
approach to solving a problem but as the optimal approach

• A heuristic is the best solution to a particular problem; what is the best way for me to answer this question, given all of my constraints

Question 12

What is Perceptual Decision Making?

Answer 12

Objective (externally defined) criterion for making your choice
* Are the dots moving left or right?

Question 13

What is Value-based Decision making?

Answer 13

• Subjective (internally defined) criterion for making your choice
• Do I want cake or ice cream for dessert?
• Depends on motivational state and goal

Question 14

What are Decisions under risk?

Answer 14

• Decisions when outcomes are uncertain
• Ambiguity: when you have incomplete information out the consequences

Question 15

What can risks be framed as?

Answer 15

Gains or losses

Question 16

What are most people’s attitudes to risk?

Answer 16

Risk averse

Question 17

What is Risk premium?

Answer 17

Difference between expected gains of a risky option and a certain option

Question 18

What is Risk averse?

Answer 18

Decision maker has positive risk premium
* Need a chance at winning a lot more than a certain option to select the risky option

Question 19

What is Risk neutral

Answer 19

Decision maker has zero risk premium
* No difference in the options

Question 20

What is risk seeking?

Answer 20

Decision maker has negative risk premium
* Doesn’t need the chance at winning more than the certain option to gamble

Question 21

Are risk preferences rational?

Answer 21

people are inconsistent in their
preferences which has been taken as a bias
* We do not follow expected value

Question 22

What is the The framing effect?

Answer 22

Gain framing
* Program A: 200 lives could be definitely be saved
* Program B: Even if the risky option doesn’t work
out, those are 200 lives I could have saved!

Loss Framing
* Program A: I am for sure killing 400 people
* Program B: If the risky option does work out,
nobody will die!

Question 23

How does the framing effect change peoples risk premium?

Answer 23

risk-averse when the options are described as gains

People are risk-seeking when the options are described as losses

Question 24

What is the endowment effect?

Answer 24

The tendency to ascribe higher value to objects people own or possess compared to identical objects they do not own.

Question 25

What is Prospect Theory?

Answer 25

A psychological theory that explains how people make decisions under uncertainty

Two major features:
1. Shape of Utility function (Losses vs Gains)
(Subjective value assigned to an object)

2. Shape of Probability weighting function (Unlikely vs Likely events)
   (people do not treat
   probabilities in an objective manner
   Extremity of event related to perceived probability
   * Unlikely events are overestimated
   * Likely events are underestimated)

Question 26

What are Prediction errors (PE)?

Answer 26

The difference between what you predicted would happen and what actually happened

Prediction errors can be:
* Positive: Unexpectedly good outcome
* Negative: Unexpectedly bad outcome