Judgement & Choice Making Flashcards
Judgement
An assessment of the likelihood of a certain event based on incomplete information
Decision-making
The act of selecting one option from several possibilities
Bayesian inference
The formula: where one makes statistical inferences where original estimates are modified by new evidence or experience to create later estimates
Bounded rationality
We are rational, but within limits.
Satisficing
When one considers options one by one and then chooses one that meets their minimum level of acceptability
Heuristics
Strategies that ignore some of the information with the aim of being able to make faster decisions than more complex methods
What are the 5 types of heuristics?
1.Representativeness heuristic
2. Availability heuristic
3. Affect heuristic
4. Recognition heuristic
5. Anchoring-and-adjustment heuristics
Representative heuristic
We judge the probability of an event by its representativeness in a population
Availability heuristic
Frequencies of events are estimated based on the ease with which they can be retrieved (affect by recency and familiarity)
Affect heuristic
Using emotional responses to influence quick judgements
Recognition heuristic
When you know one category and not the other, you are likely to conclude that the recognized category has a higher frequency
Anchoring-and-adjustment heuristic
You make an initial assessment (anchor), and then adjust it to the final estimate. The adjustment is often not sufficient
People often ignore _________. This is the information about the normal frequency of an event in a given population
Base-rate information
Biases
Thinking errors people often make when making decisions
What are the 3 biases?
- Illusory correlation
- Overconfidence
- Hindsight bias
Illusory correlation
People think that two variables are statistically related (even when they’re not)
Overconfidence
People overestimate themselves
-You can counteract with Crystal-ball technique where you imagine that your decision is wrong
-My-side bias: the overconfidence that only your view is correct in a confrontational situation
Hindsight bias
When looking at a situation in retrospect, people often suspect that they can see all the signs that lead to a particular outcome
Fallacies
Misconceptions that occur due to heuristics
What are the 5 fallacies?
- Gambler’s fallacy
- Hot-hand effect
- Conjunction fallacy
- Double conjunction fallacy
- Sunk-cost fallacy
Gambler’s fallacy
An assumption that the probability of an event is influences by a previous event (e.g., not throwing tails for the 4th time)
Hot-hand effect
A belief that a certain course of events will continue (opposite of gambler’s fallacy)
Conjunction fallacy
People think that the probability of the combination of two events (A and B) is greater than the probability of one event (A or B) on its own
Double-conjunction fallacy
The combination of two events is considered more likely than each of the events individually
Sunk-cost fallacy
People keep investing in a decision simply because they invested in it before and hope to recover the investment
The expected utility theory claims ___
that people choose between different options perfectly using two factors: the expected utility (outcome) and the probability
Criticism of expected utility theory
People show irrationality and violate invariance because people’s choices appear inconsistent
The prospect theory claims ____
that we make decisions based on gains and losses form our starting point.
- Pain of losses is greater than pleasure from gaining
Prospect theory: When people deal with potential gains, they are ___. With potential losses, they are ___.
When people deal with potential gains, they are risk-aversive. With potential losses, they are risk-prone
Framing
The way options are presented have an impact on the choice
What 2 factors in framing influence decision making?
- The background information
- Whether the questions is presented as a gain or a loss
Temporal value asymmetry
People place more value on the future than on the past (also short-term over long-term)
Psychological accounting principle
People make different decisions depending on how the outcome is felt or perceived
What are 2 ways to improve decision making?
- Using base-rate information more
- Rely less on System 1 (intuitive, automatic), and more on System 2 (analytical, delibrate)
