Decision Making (3)

Question 1

What are the key words for this section?

Answer 1

• Probabilistic reasoning
• Bayes theorem
• Base rate neglect
• Heuristic
• Availability
• Anchoring
• Representativeness
• Dual Process Theory

Question 2

What is a Heuristic?

Answer 2

Cognitive “rule of thumb”, “mental shortcut”, “best guess” used in judgement and decision making:

• Essential for humans to make decisions under uncertainty
• they lead to faulty beliefs/decisions (a bit like illusions in perception)
• methodology - studying errors and biases shows how people make decisions under uncertainty
• descriptive account

Question 3

What is the Expected Utility Theory?

Answer 3

• Utility is the subjective value we attach to an outcome
• in any situation we seek to maximise utility
• to make a decision we adopt a strategy that will yield the maximum utility for us
• expected utility = p(outcome)* utility

Question 4

What is the Prospect theory - Loss Aversion?

Answer 4

• The tendency to be more sensitive to potential losses than to potential gains

Question 5

What is Bounded Rationality and does it show/do?

Answer 5

• A descriptive theory

“Satisficing”

• Satisfactory
• sufficient
• go through menu options to find the first one that meets the minimum requirements
• satisficers seek a good solution
• maximisers seek the best/a perfect solution

Question 6

What is meant by ‘Availability Heuristic’?

Answer 6

• “The rule of thumb that the frequencies of events can be estimated by the ease with which they can be retrieved and brought to mind”