Decision Making Flashcards
Framing effects
The way information is presented (as a gain or a loss) significantly impacts decision-making behaviour.
People show different risk preferences based on whether they perceive a situation as a potential gain or loss, even if the objective outcomes are the same.
Win frame & Loss frame
Win frame:
When outcomes are framed as potential gains, individuals tend to be risk-averse.
Loss Frame:
When outcomes are framed as potential losses, individuals tend to be risk-seeking.
Prescriptive model
How humans should make decisions - how people ought to behave to be considered rational. (like the expected value theory)
Bayes theorem serves as a presciptive model where we can precisely determine the posterior probability of a hypothesis given the prior and conditional probabilities.
(think the sickness example - The test was 99% accurate if you have the disease but not when following Bayers’s theorem)
Descriptive model
How humans actually behave.
(Think utillity function and propect theory - value function)
Base rate neglect
When you fail to take prior probabilities (or base rates) into account when making probability judgments.
(think the sickness example - The prior probability is the probability of having the disease in general (1%) )
Conservatism
Puts way too much meaning in the prior probability of something. Don’t give the “evidence” enough weight
(think the sickness example - The prior probability is the probability of having the disease in general (1%) and the evidence being the positive test)
Prior probability
The probability that a hypothesis is true (irrespective of the evidence)
Bayes’s theorem
It enables us to precisely determine the posterior probability of a hypothesis given the prior and conditional probabilities. This serves as a prescriptive model for judgement under uncertainty
Mark gave two examples sickness and spam filters.
Conditional probability
The probability that a particular type of evidence is true when another specific hypothesis is true. (eg. the probability of a burglary when the door is ajar. Or the probability of not being burglarized when the door is ajar)
The ventromedial prefrontal cortex
The portion of the cortex in the front centre of the brain.
Supposedly involved in decision-making and self-regulation, like gambling behaviour.
Phineas Gage was an example of someone with damage in that area and after the accident, his personality had major changes.
It also tracks probability of reward and is involved in deciding on personal dialemmas
Posterior probability
The probability that a hypothesis is true after consideration of the evidence (can be calculated using Bayes equation)
Gamblers fallacy
The belief that the likelihood of an event increases with the amount of time since the event last occurred. (eg. after 5 times of heads, one would maybe expect the next ‘have’ to be tails because of what we have experienced before and the general perception of a 50/50 probability outcome)
Recognition heuristic
A heuristic that applies in cases where people recognize one item and not another,
leading them to believe that the recognized item has a higher value than the
unrecognized item with respect to a specified criterion
Subjective utility
The value that someone places on something
Subjective probability
The probability that people associate with an event, which does not need be identical to
the event’s objective probability
For instance, a participant might prefer a 1% chance of $400 to a 2% chance of $200 because 1% is subjectively represented as more than half of 2%
What is a personal dilemma and what brain parts does it activate?
A dilemma where people feel more personally related to it (etc. pushing a person on to the tracks to save 5 people)
there is activation in the regions associated with emotions (ventromedial prefrontal cortex)
What is an impersonal dilemma?
A dilemma that people feel more distant to (etc. hitting a switch that kills one person and saves 5)
There is activation to the parietal cortex that has to do with cold calculation
Probability matching
Choosing among alternatives in proportion to the success of previous choices
What is expected value theory?
A theory that assumes that the subjective value is equal to the objective value
Marginal probability
The probability of a single event occurring independent of other events
Bayes equation
The likelihood (prob. of seeing the observed evidence IF the hypothesis is true) x the prior probability (prob. of the hypothesis being true irrespective of the evidence) devided by the marginal probability (prob. of observing the evidence in general)
sorry we can’t put pictures in here apparently
What is meant by risk preference?
Humans have different risk preferences which are determined by how one’s utility function is shaped
Explain a utility function
(Look at the pictures from the slides)
The utility function can either start by being over the linear line of value to subjective value –> meaning the subjective value is higher than the actual value. At some point it will even out so the subjective value is less than the actual value. This is an example of risk aversion
And vice-versa the other way around for risk seeking
Mark gave examples with the money and the pringles
The value function
Concave for gains, indicating risk aversion for gains - people “feel” gains less and less)
Convex for losses, indicating risk-seeking behaviour for losses - people “feel” loss less the more they have lost.
The graphs are also steeper for losses than for gains, this is the concept of loss aversion - losses are perceived as more significant than gains of the same size - meaning that we would rather not lose than win
Expected utility theory
The subjective value is equal to f(objective value).
Your risk preference determines utility
Reference Dependence (value function)
People evaluate outcomes relative to a reference point -> could be their current endowment or status quo
Gains and losses are therefore assessed differently as the reference point changes rather than being dependent on absolute wealth.
“Most” millionaires have the same reference point as the average normal-income person.
Nucleus Accumbens
Area in the basal ganglia which reflectsmagnitute of reward (more activation on 50% of 5$ tham 50% of 1$)
