L13 Intro to decision making Flashcards
What are the three different approaches to decision making?
Normative
Descriptive
Prescriptive
What is normative decision making
What a rational person would do
What is descriptive decision making
What people actually do
What is prescriptive decision making
Given the gap between rational and descriptive - what should people do
What is a judgement?
Estimates about the value or likelihood of particular events or outcomes (or quantities)
What are the components of a judgement?
- The unobservable state of the world (uncertainty)
- Cues
Describe what cues are
Observable features that may be more or less predictive of the unobservable state.
In what ways do cues vary?
In predictive strength (different cues are better than others)
and utilization (people don’t pay attention to cues the way they should)
What are the components of a decision?
Alternatives
States of the world
Outcomes
Utilities
Objectives
How do states of the world and alternatives combine in decision making?
Different states of the world will influence the type of alternative you decide to choose.
(e.g. cancer will spread if not taken out = removal of cancer // if benign = no removal)
What are the two types of decision situations?
Uncertainty (the state of the world are unknown and probabilities are unknown)
Conflict (like uncertainty and other people’s choices affect outcomes)
Which two key components of a decision should be considered to understand the possible outcomes?
States of the world and alternatives
In decision making, what does ‘alternatives’ mean?
The different decisions that can be made.
In decision making, what does ‘states of the world’ mean?
Conditions that may/may not be present; relevant to the decision or not under your control (uncertainty)
In decision making, what does ‘outcomes’ mean?
Possible alternate states of the world
In decision making, what does ‘utilities’ mean?
The subjective value of an outcome
(e.g. some people think nausea is a worse outcome than others)
In decision making, what does ‘objectives’ mean?
Things you wish to achieve when making the decision
- Can override other aspects of decision making*
(e. g. cancer patient not getting treatment because they want to keep their money (maintain wealth))
What type of theory is expected utility theory (EUT)
What does this mean?
Normative
How you should make decisions if you were a perfectly rational being
(theory is based off economics)
What are the 6 principles of expected utility theory?
Dominance
Ordering of Alternatives
Cancellation
Continuity
Invariance
Transitivity
(D.O.C.C.I.T)
In EUT, describe the principle of ‘ordering of alternatives’?
Prefer one alternative over the other, or be indifferent
In EUT, describe the principle of ‘dominance’?
Always choose the dominant alternative (one which gives highest utility)
In EUT, describe the principle of ‘cancellation’?
Same outcomes in different alternatives will cancel each other out
In EUT, describe the principle of ‘transivity’?
Prefer A over B, and B over C, then will prefer A over C
In EUT, describe the principle of ‘continuity’?
Prefer gamble between 10 bucks and nothing to a sure gain of 10 bucks, provided the chances of getting nothing are minuscule
In EUT, describe the principle of ‘invariance’?
Should be unaffected by the way alternatives are presented
What is the Allias Paradox?
Both A-C and B-D are the same, however, people prefer A in the first scenario and D in the second (preference reversal).
What EUT principle does the Allias paradox violate?
The cancellation principle
What does the Alliax paradox tell us about EUT?
It is an unreasonable model because it assumes people are fully rational in their decision making.
What type of theory is Prospect Theory (Kahneman and Tversky)?
What does this mean?
Descriptive
It is a theory that accounts for the behaviour of real decision makers.
What are the two innovations of Prospect Theory?
People make decisions based on value instead of utility
Losses mean more than gains to people.
In prospect theory, what are ‘framing effects’?
The way a question is framed influences the outcome of a decision.
(e.g. people are more hesitant if a risk is framed in terms of a loss instead of a gain)
What does Prospect Theory say about when people overweight or underweight probabilities?
People overweight small probabilities
People underweight large probabilities
What is the Endowment Effect?
Something is considered to be of greater value when the prospect of losing it looms large.
(We value things we are losing more than things we are gaining)
