Judgement And Decision making

Question 1

Utility

Answer 1

Degree that an event or object helps achieve goals
Positive utility = moves closer to goals
Negative utility = moves further from goals

Utility can differ between people and ever time eg-sentimental value (childhood photos)

Question 2

Expected utility theory

Answer 2

Economic theory describing how people make decisions
People behave in ways that maximise expected utility

Eg - utility of water = just drank negative utility, lost in desert positive utility

Question 3

Probability

Answer 3

Expected part
Consider probability of each outcome helps calculate how much utility to expect from particular decision
Then pick options with maximum expected Utility

Eg- expected utility from lotto ticket = don’t buy

Question 4

Rationality

Answer 4

Assumes we are rational decision makers
Often make simplifying assumption that utility = monetary Utility
Small cost of lotto ticket isn’t bearing on goals but win would move toward goals= rational purchase

Question 5

Risk aversion

Answer 5

Preference for relatively certain outcomes over uncertain outcomes (the safe option)
On average population is risk averse

Question 6

Loss aversion

Answer 6

Prefer avoiding lose than acquiring similar sized gains
Neg utility from losing is stronger than positive utility of gaining

Population on average is loss averse

Question 7

Aversion evidence for

Answer 7

Risk and loss aversion is evidence that people do not simply seek maximised utility (at least in terms of money)

Question 8

Framing effect

Answer 8

Make different decisions in same situation depending on framed as potential gains or loses

Question 9

Status quo bias

Answer 9

Choose option most similar to currently doing
Default option over other even when default isn’t good

Explains why people take action when must opt out than opt in
Organ donor Aus opt in
Mailing list after purchase - opt out (bigger reach)