Final Lecture 20: April 3

Question 1

what is Base Rate Neglect:

Answer 1

When you fail to use information about the prior probability of an event to judge the likelihood of an event

Question 2

what is Conjunction fallacy:

Answer 2

False belief that the conjunction of two conditions is more likely than either single condition

eg Linda the feminist Bank Teller
¤ Because the description was more representative of both categories people think the
conjunction is the most likely label

Question 3

Anchoring and Adjust judgements are too heavily influenced bywhat

Answer 3

initial values

Question 4

what is Regression toward the mean:

Answer 4

when a process is somewhat random (i.e. weak correlation), extreme values will be closer to the mean (i.e. less extreme) when measured a second time

Question 5

Regression toward the mean is related to what

Answer 5

illusionary correlations

Question 6

what are illusionary correlations

Answer 6

People tend to see causal relationships even when there are none

Question 7

A pageant mom rewards her daughter when she preforms unexpectedly well and wins a pageant. But the next pageant she comes in last place, the mom punishes her and the following competition she does well. The mom concludes punishment works better than rewards.

is this accurate

Answer 7

Related to our understanding of the roles of reward and punishment on learning
¤ Can’t always attribute changes in performance to manipulations ¤ Sometimes it’s just noise

Question 8

Why use Heuristics

Answer 8

People are thought to be Bounded rational

Question 9

what is Bounded rational

Answer 9

meaning they are limited by both environmental constraints (e.g. time pressure) and individual constraints (e.g. working memory, attention)

Question 10

People are Satisficers

what is this (Bounded Rationality)

Answer 10

look for solutions that are “good enough”

¤ ”Making do” with the limitations we have as humans
¤ Although heuristics sometimes provide incorrect answers and lead to biases; they also work

Question 11

what is Ecological Rationality

Answer 11

which sees heuristics not as a “good enough” approach to solving a problem but as the optimal approach

Question 12

While previous views on heuristics drew a separation between how we should act and how we do act, Ecological rationality does what

Answer 12

does not distinguish these two

Question 13

Given the right environment, a heuristic can be better than what

Answer 13

optimization or other complex strategies

Question 14

Say you have some money you want to invest and a bunch of options to choose form, but limited information about how risky each one is or the past performance…
¤ Equally dividing your assets (money) among the options (1/N heuristic) has been shown to provide better results than other more complex optimization algorithms
¤ Sometimes heuristics (give the right circumstances) can be better than complex strategies

what is this an example of

Answer 14

Ecological Rationality

Question 15

Summary: Heuristics and Biases

Answer 15

Heuristics and biases arise from the limitations we face but can sometimes produce correct responses
¤ Applying heuristics too often can lead to biases

Several examples of Heuristics ¤ Availability
¤ Representativeness
¤ Anchoring and adjustment ¤ Regression towards the Mean

Question 16

Which of the following is not true about Heuristics and biases?
¤ A) The Conjunction Fallacy arises because people use the Availability Heuristic ¤ B) Regression towards the mean only happens where there is not a perfect correlation ¤ C) Heuristics sometimes can give the right answer
¤ D) People use heuristics because we are boundedly rational

Answer 16

A) The Conjunction Fallacy arises because people use the Availability Heuristic

Question 17

wha are the Kinds of Decision-Making

Answer 17

Perceptual Decision Making
Value-based Decision making
Risk

Question 18

what is Perceptual Decision Making:

Answer 18

objective (externally defined) criterion for making your choice ¤ Are the dots moving left or right?

Question 19

what is ¤ Value-based Decision making:

Answer 19

subjective (internally defined) criterion for making your choice ¤ Do I want cake or ice cream for dessert?
¤ Depends on motivational state and goal

Question 20

what is ¤ Risk

Answer 20

can be defined as taking an action despite the outcome being uncertain ¤ Specific to Value-based decision making

Question 21

explain Risky decision making

Answer 21

¤ It is adaptive to be able to make decisions when there is risk
¤ Most people are risk averse
¤ Extremes in risk taking (high or low) can be very harmful ¤ Stagnant living
¤ Addiction and impulsivity

Question 22

wha are the 4 Risk attitude profiles

Answer 22

Risk premium
Risk averse
Risk neutral
Risk seeking:

Question 23

what is Risk premium

Answer 23

difference between expected gains of a risky option and a certain option

Question 24

what is Risk averse:

Answer 24

decision maker has positive risk premium

¤ Need a chance at winning a lot more than a certain option to select the risky option

Question 25

what is ¤ Risk neutral:

Answer 25

decision maker has zero risk premium

¤ No difference in the options

Question 26

what is ¤ Risk seeking:

Answer 26

decision maker has negative risk premium

¤ Doesn’t need the chance at winning more than the certain option to gamble

Question 27

are Risk preferences irrational

Answer 27

Risk preferences are not themselves irrational

Question 28

what can account for individuals’ risk

preferences

Answer 28

Classic (rational) economic theories (Expected Utility theory)

Question 29

Classic (rational) economic theories (Expected Utility theory) can account for individuals’ risk
preferences
¤ However, it has been empirically observed that people are inconsistent in their preferences which has been taken as awhat

Answer 29

bias

Question 30

Classic (rational) economic theories (Expected Utility theory) can account for individuals’ risk
preferences
¤ However, it has been empirically observed that people are inconsistent in their preferences which has been taken as a bias
¤ These inconsistencies cannot be explained using rational economic theories (How should people act? what cane explain thm

Answer 30

Birth of Behavioural Economics: How do people act?

Question 31

what is The framing effect

Answer 31

¤ Inconsistent Risk preference depending on the framing (loss vs gains) of the problem

Question 32

Imagine that the country is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Which program would you choose?
¤ If Program A is adopted, 200 lives being saved.
¤ If Program B is adopted, there is a 1 in 3 probability of saving 600 lives and a 2 in 3 probability of saving no lives.
¤If Program C is adopted, exactly 400 people will die.
¤ If Program D is adopted, there is a 1 in 3 probability that nobody will die and a 2 in 3 probability that all 600 will die.

this is an example of what

Answer 32

the framing effect

Question 33

People are risk-averse when the options are described as gains explain

Answer 33

¤ They prefer the sure thing and go for safety ¤ The cup is half full – do I need more?

Question 34

People are risk-seeking when the options are described as losses explain

Answer 34

¤ They can tolerate an uncertain thing and risk a game

¤ The cup half empty – don’t take any more away!

Question 35

what is Endowment Effect

Answer 35

Once ownership is established, people are averse to give it up

people given a mug want to sell it for more than what people were willing to buy it for

Question 36

whats Prospect Theory

Answer 36

Birth of Behavioural Economics (Kahneman & Tversky 1979, 1992) ¤ Two major contributions:
¤ Shape of Utility function (losses vs Gains)
¤ Shape of Probability Weighting function (Unlikely vs Likely events)
¤ Describes how people do act not how people should act

Question 37

Prospect Theory predictswhat

Answer 37

risk preferences when gambling

Question 38

what is Utility:

Answer 38

Subjective value assigned to an object; satisfaction

¤ Context dependent

Question 39

Utility is assigned to what

Answer 39

monetary amount as a function of someone’s current state (reference point) and not in absolute value
¤ Deviations from the reference point will determine risk preference
¤ Anchor and Adjustment heuristic

Question 40

what is Utility function

Answer 40

Describes how people map money to satisfaction

¤ The extra satisfaction earned from gaining a dollar is larger when you only have $1 vs when you have $1M

Question 41

explain how utility function is Asymmetrical

Answer 41

Steeper for Losses than Gains $1 lost hurts more than one dollar earned
¤ Losses loom larger than gains (framing effect)

Question 42

for Prospect Theory, are probabilities treated objectively

Answer 42

Probabilities are not treated objectively ¤ Extreme events tend to be rare

Question 43

explain Extremity of event related to perceived probability

Answer 43

¤ Unlikely events are overestimated ¤ Likely events are underestimated

Question 44

Availability of an option changes what

Answer 44

the perceived frequency of occurrence

Question 45

high prob and losses =

Answer 45

Risk Seeking

Question 46

high prob and gains =

Answer 46

Risk Averse

Question 47

Low Probability and losses =

Answer 47

Risk Averse

Question 48

Low Probability and gains =

Answer 48

Risk Seeking

Question 49

Summary: Prospect Theory

Answer 49

Prospect Theory describes how people behave ¤ What people do vs what people should do?

The Utility function describes how people treat gains & losses ¤ Losses loom larger than gains
¤ Linked to the framing effect

Probability Weighting function describes how people understand likelihoods ¤ People tend to overestimate rare events and underestimate mundane events

Question 50

what is Dual Process Theory

Answer 50

It is thought that there are two systems for making decisions
system 1 and system 2

Question 51

what is System 1:

Answer 51

Fast, effortless, automatic, intuitive, emotional
¤ Thought to be related to the evolutionarily ancient parts of the brain (common to many species) ¤ Limbic System
¤ Heuristics and biases

Question 52

what is System 2:

Answer 52

Slow, deliberative, Effortful, explicit, logical ¤ Thought to be unique to humans, evolutionarily recent ¤ Frontal cortex

Question 53

Participants made choices between two outcomes framed as gains or losses ¤ A risky (A gamble) outcome
¤ A safe (A Sure thing) outcome

what happens in the amygdala

Answer 53

Increased amygdala activity for chosen safe outcomes for gains and chosen risky outcomes for losses suggests that an emotional response may underlie the framing effect
¤ Unclear if activity is result of choice or predicts choice

Question 54

Participants read newspaper stories designed to induce positive (happy) or negative (sad) affect
¤ Then, the participants estimated frequencies of death for various causes
¤ High risk
¤ Non-fatal risk
¤ Low risk life problems what was the conclusion

Answer 54

There were higher estimates of death frequency when people were in a negative mood compared to a positive mood

Question 55

what is Prediction error (PE):

Answer 55

The difference between what you predicted would happen and what actually happened

Question 56

Example: You go to buy Perrier
¤ Surprise! It’s on special (cheaper than usual)
¤ Inflation! It’s marked up (more expensive than usual)
way are these examples of

Answer 56

prediction error

Question 57

give the purpose of Prediction Errors

Answer 57

Prediction Errors are thought to drive learning (reinforcement learning)

Question 58

Prediction errors can be hat

Answer 58

¤ Positive: Unexpectedly good outcome ¤ Negative: Unexpectedly Bad outcome

Question 59

what is th Mood affect real world Gambling

Answer 59

Prediction errors in sports outcomes and the weather have been found to affect people’s mood
¤ Positive PE increases positive affect
¤ Negative PE increases negative affect
¤ Changes in mood predict risky decision-makingàwhen people are happy they are more likely to gamble

Question 60

Summary

Answer 60

Evidence suggests biases in risky choice are related to affective (as opposed to deliberative) decision-making
¤ Activity in brain areas implicated in emotion have been linked with biased decision making

¤ Changes in mood relate to assessment of risk level à negative mood increased people’s
estimated frequency of negative events
¤ Changes in mood driven by prediction errors have been found to influence people’s risk attitudes in the real world

Question 61

Which of the following statements about Prospect Theory is false?
¤ A) It tells us how people do act instead of how the should act
¤ B) The asymmetry of the utility function is made to account for the framing effect
¤ C) People tend to overestimate the probability of rare events and underestimate the probability of common events
¤ D) Utility is an immutable property and is reference independent

Answer 61

D) Utility is an immutable property and is reference independent