Decision Theories Flashcards
What are the two sides of decision theories?
Optimal decision making (normative) = how we should make choices
VS
Realistic decision making (descriptive) = how we actually make decisions
What is the optimal decision making process?
- define the problem (ex: i need a new laptop)
- identify criteria (ex: I want big storage, graphics card, HDMI port, etc.)
- weight criteria (ex: storage = 40%, graphics card = 10%, HDMI port = 30%, etc)
- generate alternatives (ex: asus vivobook, chromebook) – check alternatives with criteria
- compute and choose optimal product
What is a mathematical example of an optimal POV?
Calculate expected value of buying insurance:
Buy = -$100
Don’t buy =
- 10% chance get in accident with $1500 damages
- 90% chance no accident ($0)
= 0.1 * 1500 + 0.9 * 0 = -$150
Sooo, buy < dont buy (spend less money overall) so optimal/rational choice is to buy!
What is expected utility theory? Example?
Consumers…
- maximize utility
- have perfect info about their preferences and options
- have clear preferences among alternatives
- preferences are consistent (across time and choice situations)
Choose take $75 or 50% chance at $160
= 0.5 * $160 + 0.5 * $0 = $80!
So consumer should choose bet on $160, but actual evidence shows consumers are RISK AVERSE and prefer to choose the sure option.
SO EXPECTED UTILITY THEORY AINT PERFECT
What is prospect theory? What are the 3 key principles?
People feel about/perceive the value of objects in a non-linear fashion (expected utility says it IS linear).
3 key principles:
- judgements/decisions are influenced by reference points
- diminishing sensitivity
- loss aversion
What is the reference point principle of prospect theory? Does this work for non-real reference points? What is an example for marketing?
Evaluate products based on current state or reference point (ex: willing to pay more for product if you currently have schmoney) – current circumstances (financial, cognitive, emotional) influence how you make decisions
Yes, works on non-real ref. pts. = counterfactuals!
–> thinking about how things could have been better or worse (ex: I could be failing the class (ref pt) so now I feel better about getting a 60% on that test (evaluation)
Marketing:
Free trials create a reference point of ‘having the thing’, so buying it after prevents a loss :( , rather than the reference point of ‘not having the thing’, buying just gets it :)
What is the diminishing sensitivity principle of prospect theory?
Things have more impact the first time, and subsequent occurrences are less important
(ex: first time you get an award vs award #5)
THIS IS HEDONISTIC ADAPTATION
What is the loss aversion principle of prospect theory? What impacts it? Is it a solid theory?
Losses tend to have bigger subjective impact than gains of the same magnitude.
experiment: people who own a mug ask 3x $ to sell it than people who don’t have a mug willing to pay to get one – because loss feels like more so they want more compensation
Impacted by... - age - education - knowledge - experience Most loss aversion displayed by: older, less educated, less knowledge + less experience on the subject
Not super solid, debates around how concrete and be-all-end-all it is
What is dual process theory?
There are 2 systems of decision making: 1) Intuition - fast - based on association in memory - automatic 2) Reasoning - slow - based on rules - effortful 1 is the default, guides us, then 2 monitors and corrects 1 when it goes astray ex: like those brain teasers worded intended to mess you up (you're 6, sister 1/2 your age, how old is she when you're 60?) gotta use system 1 to overcome that automatic wrong answer of 30
When is system 2 triggered? (dual process theory)
Can system 1 be learned?
when we intentionally pause
when info in the environment conflicts with out prior beliefs/assumptions
Yes system 1 can be learned - things can go from effortful to automatic, such as driving a car
Why is system 1 so quick? Define the reason and give details.
Heuristics! = rules of thumb / mental shortcuts
- save time and energy
- leads to good decisions usually (similar to decisions you’ve dealt with before, so need less processing time) = ex: buy same product as last time
= ex: assume higher price is higher quality - not always true but lots of evidence to prove it so can assume
- susceptible to biases = systematic errors that arise when not making careful choices with system 2
What are the two approaches to decision making? What has research found regarding these?
Maximizing = search with the goal of finding absolute best option Satisficing = search until find good enough option
Research:
Maximizers find things that are objectively better but they feel subjectively worse (ex: grad find better job but less happy there)
Maximizers more likely to have higher depression anxiety regret and less satisfaction
