Decision-making Flashcards
What types of decision can we make?
- Riskless decisions
- Decisions under risk
- Decisions under uncertainty
What are riskless decisions?
The actual outcomes of the different options are known
Decisions are ‘riskless’
What are decisions under risk?
The probabilities of the outcomes are know but the ACTUAL outcome is unknown
There is an element of risk
What are decisions under uncertainty?
The probabilities of the outcomes are unknown
We might not know all possible outcomes
What must we estimate before we make a decision?
We must estimate what the outcome will be & the probability of the outcome happening
What are the normative theories (models) of decision-making?
- Expected value model
- Expected utility model
- Subjective expected utility model
What do normative theories of decision-making explain?
What we should do in an idealised version of the world
From which model do normative theories of decision-making come from?
Economic models of choice
What do normative theories of decision-making assume humans are?
Assume that we are rational - that we have time, space & all of the info we need to make a decision
Assume that we always weigh up costs & benefits of potential outcomes
What distinction is at the centre of the framework of normative theories of decision-making?
A distinction between info about what we want (utilities) & what we believe is true about the situation (expectations)
What does the Expected Value (EV) model state that all outcomes are assessed on?
All outcomes are assessed on the probability of occurrence x monetary value
Give an example of an EV model question.
Pps must choose between:
a) £80 with p = 0.20, or
b) £100 with p = 0.15
Pps should choose a) over b)…
a) EV = £16, b) EV = £15
What is a limitation of the EV model?
Not everything can have a monetary value
What is ‘expected utility’?
A type of subjective value that isn’t related to monetary values but the EU model has similar features to the EV model
What does the Expected Utility (EU) model state that all outcomes are assessed on?
All outcomes are assessed on the probability of occurrence x utility
What does the Expected Utility (EU) model claim that we do when making a decision?
Work out which outcome has the greatest utility (= subjective value)
When are EV & EU good to use?
When we have the probability of occurrence value
When do we use the Subjective Expected Utility (SEU) model?
When we don’t have the probability of occurrence value
What do we use the Subjective Expected Utility (SEU) model for?
Working out the perceived likelihood of something happening
What does the Subjective Expected Utility (SEU) model state that all outcomes are assessed on?
All outcomes are assessed on the subjective probability x utility
We rely on estimates based on info around us
What assumptions do models make based on the SEU of choice?
- We seek to maximise SEU (want to choose the option with the biggest utility gain)
- Transivity of preferences (our preferences are well-ordered)
- Invariance of preferences (our preferences stay the same, regardless of how the options are described - descriptive invariance - or how we make our choice - procedural invariance)
- We are rational & consistent (we don’t change our choices from one similar situation to another)
Who proposed elimination by aspects?
Tversky (1972)
What is the process of elimination by aspects?
- Start with the most important attribute & set a cut-off value for that attribute
- Eliminate all alternatives with values below the cut-off
- Continue with the next most important remaining attribute(s) etc. until there is only one left
When do we use elimination by aspects?
When we are faced with an important choice & have to choose between many options
What does elimination by aspects aim to do?
Cut down our choices to make it feel manageable
What are limitations of elimination by aspects?
X it doesn’t guarantee that you will end up with the best overall choice
X because of the order that you consider the attributes, you might rule out an option that could have actually been the best choice (when weighted against all the other options)
Who proposed satisficing?
Simon (1956)
What is the process of satisficing?
- Consider one alternative at a time in the order that they are presented
- Each attribute of the current alternative is compared to a cut-off standard
- If an attribute doesn’t meet the standard, it is rejected
- The first alternative to pass all cut-offs is selected
What does satisficing involve?
Looking at the whole package one-at-a-time as the options present themselves to you
You set a minimum standard across the board
We accept the first option that meets the minimum criteria
If we see many bad options at the beginning, we may lower our cut-off standard
What is a limitation of satisficing?
X we won’t necessarily choose the best option - it depends on the order that the options are presented to you
X you may miss a better alternative that comes later
Which researcher/s studied violations of transivity?
Tversky (1969)
What did Tversky’s (1969) study on violating transivity involve/find?
Pps were given CVs of 5 college candidates
From A to E there was a rise in intelligence & a decrease in social skills
Pps chose the best candidate in each pair... AB - chose A BC - chose B CD - chose C DE - chose D = transient results (well-ordered)
When pps were given the choice between A & E, they chose E as the best candidate (should have chosen A) – there was a large difference in intelligence & social skills but pps prioritised intelligence
–> violates transitivity
Which researcher/s studied violations of descriptive invariance?
Tversky & Kahneman (1981)
What did Tversky & Kahneman’s (1981) study on violating descriptive invariance involve/find?
Told pps to imagine that the USA is preparing for an outbreak of a disease that is meant to kill 600 people
Proposed 2 programs to combat the disease…
Program A = 200 people saved Program B = 1/3 probability that 600 are saved, 2/3 probability that 0 are saved
–> most pps chose A
Program C = 400 people die vs. Program D = 1/3 probability that 0 die, 2/3 probability that 600 die
–> most pps chose D
How is Tversky & Kahneman’s (1981) study on violating descriptive invariance related to framing?
Program A = Program C (200 live, 400 die)
Program B = Program D (1/3 probability that 600 live, 2/3 probability than 600 die)
Same probability but A = gains frame & D = losses frame
There is a preference reversal – risk averse for gain, risk-seeking for losses
What did Tversky & Kahneman (1981) conclude from their study on violating descriptive invariance?
A person’s choice depends on how the options are described (gains/losses frame)
What shape is utility on a graph?
Utility is an S-shaped curve - we feel losses more strongly than we value gains
We feel the same degree of loss MORE than additional gain
What effect do gains have on our happiness?
Once we have gained a particular amount, future gains have little effect (improvement) on our happiness
To what are losses & gains judged against?
Reference points
What studies have looked at the effects of framing in the real world?
Donovan & Jalleh (2000) – an immunisation was described as “90% chance of no side-effects” (positive) vs. “10% chance of side-effects” (negative)
–> pps were more likely to have the immunisation with the positive frame
Rothman & Salovey (1997) – for disease prevention behaviours, using a gains frame was more motivating (getting people to think of benefits of doing behaviour/s); for disease detection behaviours, using a losses frame was more successful at getting people to do it
Which researcher/s studied violations of procedural invariance?
Lichtenstein & Slovic (1971)
What did Lichtenstein & Slovic’s (1971) study on violating procedural invariance involve/find?
Bet 1: 99% chance of winning $4, 1% chance of losing $1
Bet 2: 33% chance of winning $16, 67% chance of losing $2
Pps were asked which bet they would choose to play
–> most pps chose Bet 1 (EV $3.95 vs. $3.94 = a rational choice)
Pps were asked how much money they would pay to play
–> most pps would pay more to play Bet 2 (focused more on potential (highest) winnings rather than the highest probability)
What is ‘perceived justification’?
We want to give reasons for our decisions
What researcher/s studied perceived justification?
Tversky & Shafir (1992)
What did Tversky & Shafir’s (1992) study on perceived justification involve/find?
Pps imagined that they had done an exam. They had to decide on a cheap holiday with an offer ending the next day, they could either…
a) buy
b) not buy
c) pay $5 to postpone the decision until later
Group 1: just passed the exam –> pps chose to buy (can justify as ‘celebration’)
Group 2: just failed the exam –> chose to buy (can justify as ‘consolidation’)
Group 3: awaiting results –> paid to postpone (couldn’t justify their decision to buy)
What is anticipated regret?
Decisions are affected by the amount of regret that we anticipate having as a result of possible outcomes
What is prefactual thinking?
Things we choose are influenced by what we think will happen & what we think we would feel IF something happened
Researchers gave pps a pen each & asked them to swap with their neighbour –> they did so.
Who did this study, and what happened when they asked pps to swap lottery tickets?
Bar-Hillel & Neter (1996)
They gave each pp a lottery ticket & asked them to swap with their neighbour –> pps were more reluctant, had to pay pps to swap them
Pps think “will I regret this if they win with my ticket?”
= a probabilistic aspect
Pps were given a scenario - “you are on your way to a test & realise you are unsure whether you locked your car”
Who did this study, and what happened in each group?
Hetts et al. (2000)
Group 1: told to think about how they would feel if they didn’t check their car & it was stolen
–> most pps would check (imagined regretting not checking)
Group 2: told to think about how they would feel if they checked their car, it was locked & they were late to the test
–> most pps would carry on to the test
Who studied the role of price guarantees?
McConnell et al. (2000)
What do price guarantees do?
They take away the element of regret
Encourage people to ‘buy now’
Once we have made a choice, we tend to stop looking for other (cheaper) alternatives elsewhere
Simon (1956) claims that we do well within the constraints that we have. What are these constraints?
Limited time
Limited info
Don’t have all the options within our grasp
Don’t always know the probabilities of all the outcomes
Simon (1956) claims that we use ______ rationality to make choices - we do as well as we can with the info that we have
Simon (1956) claims that we use BOUNDED RATIONALITY to make choices - we do as well as we can with the info that we have
What do dual process theories of rationality assume that humans are like?
We can be rational, weigh up costs & benefits & think through things logically to try & arrive at the best possible choice
Name the 2 dual process theories
System 1: fast, automatic, heuristic; relies on rules of thumb; can be efficient & helpful in making decisions quickly rather than weighing up costs & benefits
System 2: slow, effortful, logical, calculating; weigh up costs & benefits; use it when we need to think about a choice
