Decision making - RD4 Flashcards
What is a decision?
Choosing a specific option from multiple options
What do judgements and decisions each emphasise?
judgements = accuracy
decisions = consequences
What are normative theories?
concerned with how people should make decisions rationally
What are descriptive theories?
concerned with how people actually make decisions
What the main assumption of utility theory?
people act (rationally) to maximise expected utility
we calculate expected utility for each outcome and choose the highest one (starting point irrelevant)
What is expected utility?
p(given outcome) x utility of outcome
so how likely an outcome is x a subjective value of how good it is
What do people do in a toin coss situation with a chance of losing some money or gaining even more money?
less likely to go for it, even though they have a chance of getting more money (not rational)
What are the 3 main assumptions of prospect theory?
- individual identify a reference point representing their current state
- more sensitive to potential loss than gains (loss aversion)
- overweight rare events
What is a value function?
the relationship between utility (subjective value) and actual gains/losses
How does prospect theory explain the toin coss examples better than utility theory?
- the subjective value of a loss is greater than a gain
- people overweight the chances of a loss
What is the framing effect?
decisions are influenced by irrelevant aspects of the situation and the way a decision is framed can alter how people choose
What was found in the Asian disease problem when participants were told the probabilities of people being saved (gain-frame condition)?
72% chose 200 definitely being saved over 1/3 chance that 600 will be saved, even though the probabilities are the same (opposite of loss-frame)
What was found in the Asian disease problem when participants were told the probabilities of people not being saved (loss-frame condition)?
78% chose 1/3 chance of 600 dying over 200 definitely dying, even though the probabilities are the same (opposite of gain-frame)
Why might the Asian disease problem results have happened?
- loss aversion to the high probability that 400 will die
- overweighting rare events (1/3 probability that no one will die)
What did Mandel and Vartanian (2011) find when they gave all information about the Asian disease problem?
Framing effect disappeared and it was 50/50 for the options - so it gets rid of any ambiguity
What did Almashat et al (2008) find when participants listed advantages/disadvantages of options of cancer treatments?
the framing effect disappeared
what is the sunk-cost effect?
pursuing an action after it has proved suboptimal because resources have been invested already
What happens in the ill on the way to a hotel you paid a deposit for scenario?
People still choose to go even though they won’t have a good time and will lose more money paying the full cost
sunk-cost fallacy
What did Baliga and Ely (2011) find when giving business students information about investments? How did they explain it?
There was no sunk-cost fallacy - chose to switch investments
- could be because of their expertise on the topic
What did Hertwig (2004) suggest about rare events when decisions are based on descriptions or experience?
- descriptions = overweighted
- experience = underweighted
Why might we underweight rare events based on experience? (2)
- low sampling (never experienced it before yourself)
- availability heuristic (an example doesn’t come to mind)
What is loss neutrality and when is it found and not found?
- understanding that the options have the same outcome
- found when people are choosing between small amounts (toss a coin for £1 loss or gain, or choose to toss another coin for £5 loss or gain - so they have the same overall outcome no matter which you choose)
- breaks down with larger amounts (more to lose - loss aversion?)
What are some problems with prospect theory? (3)
- doesn’t explain why the value function exists
- many predicted phenomena can disappear in specific situations
- doesn’t account for individual differences (e.g. self-esteem and narcissism)
What is impact bias?
overestimation of the intensity/duration of negative emotions to loss