Judgement & Decision Making Flashcards
define decision making
choosing a course of action
define judgement
making an evaluation
define reasoning
drawing out further conclusions from a set of facts
what is the normative question?
how should we think?
what are common normative frameworks?
expected utility theory weighted additive model eg lens model; logic eg propositional logic; probability eg. Bayes theorem
what does a ‘normative’ framework’ calculate?
the optimal solution - the definition of being rational
what is the equation for expected utility?
likelihood x benefit
describe the expected utility theory
can you do the calculation with factors that are hard to quantity? these have the more abstract notion of ‘utility’ ie. how much good would each one provide - subjective expected utility theory
what is the descriptive question?
how do we actually think?
what is a cognitive bias?
a systematic deviation from the normative solution: not a random error but a specific pattern of non-optimal behaviour that people repeatedly show
name some examples of biases
confirmation; hyperbolic discounting; illusory truth effect; sunk cost effect; disposition effect; IKEA effect
describe confirmation bias
Nickerson, 1998. tendency to focus on info that supports your opinion
describe hyperbolic discounting
Kirby & Hernstein, 1995. prefer immediate to long term payoffs
describe the illusory truth effect
Begg, Annas, Farinacci, 1992. repeated info more likely to be judged as true.
describe the sunk cost effect
Arkes & Blumer, 1985. continue a behaviour because of previous investment when no longer sensible to do so
describe the disposition effect
Shefrin & Statman, 1985. sell shares that have gone up, keep shares that have gone down
describe the IKEA effect
Norton, Motion & Ariely, 2012. prefer self-made products, meals etc.
describe prospect theory
cognitive biases show we do not calculate expected utility accurately. p.t describes somatic biases in our valuation of likelihood and benefits
describe how we evaluate whether an outcome is good or bad
with reference to our current state, however relatively good or bad that might be. we consider losses as more serious than equivalent gains, and there are diminishing returns on the benefits we gain from positive outcomes or loss from negative outcomes
describe overweight certainty
the certainty effect. guaranteeing something will occur is in itself useful
describe overweight small probabilities
eg. i might win the lottery
describe underweight probable but not certain events
eg what if we get a hard exam q
describe the framing effect
presenting information as a gain or loss causes people to be risk seeking or risk averse
how do traditional economic models assume people act?
rationally - they don’t