Decision-Making

Question 1

Elements of Decision-Making

Answer 1

• More than one option
• Identify consequences of each option
• Evaluate how good or bad they’ll be
• Method for weighing good or bad features
• Mechanism for deciding

Question 2

Helson’s Adaptation-Level Theory

Answer 2

• People adapt to changes & evaluate magnitudes relative to adaptations
• Evaluations are linear functions of differences from adaptations

Question 3

Parducci Range-Frequency Theory

Answer 3

• Range: where a value is between the smallest and largest values in the distribution
• Frequency: how many of each value level there are; evaluate your relative percentile rank

Question 4

Choplin’s Comparison-Induced Distortion Theory

Answer 4

• Verbal comparisons suggest quantitative differences between values
• Comparison suggested differences bias comprehension, evaluation, and the estimation of magnitudes
• Actual differences are generally smaller and will be overestimated
• Ex. “Albert is taller than Bill” Most people assume 3-6 inches, not 1/2 an inch.

Question 5

S-Shaped Evaluation Function

Answer 5

• See notes for distribution
• You’re extra sensitive to differences that are around your adaptation level (what you’re used to)
• More sensitive to losses than gains
• People under-react to the objective value of big changes (e.g. difference between $0 and $1 dollars seems smaller than $1,000,000 and $100,000,001)

Question 6

Endowment Effects

Answer 6

People value things more when they feel they own them.

• E.g. 30-day money-back guarantee, IKEA, ebay
• Sunk cost, yo!

Question 7

Expected Value

Answer 7

• Equal to the amount that you would win times the probability of winning
• Normative Decision Rule: always choose the option with the highest expected value

Question 8

Luce Choice Axiom

Answer 8

• Goal: try to predict the likelihood that people will pick one option over another
• How good an item/option is divided by how good all of the other items/options are