Perception and Decision Making Flashcards
System 1 type of thinking
intuitive, automatic, fast and often unconscious
System 2 type of thinking
Deliberate, effortful, slow and controlled
Prospect theory provides us with?
subjective value function
Prospect theory value is segmented into?
gains and losses relative to a reference point
Examples of prospect theory
Diminishing activity or loss aversion
Loss aversion means
losses loom larger than gains
Prospect theory processes would include
reference dependence, loss aversion and diminishing sensitivity
Implications of prospect theory would include
endowment effect and mental accounting
Endowment effect
people value something more once they own it
Mental accounting
set of cognitive operations to categorize, evaluate and keep track of financial activities
Heuristics
Quick rules of thumb
Bias
Applying heuristics inappropriately
Anchoring or adjustment
people make estimates or decisions starting from an initial value, the anchor, and adjust based on new information
Availability heuristic
readily available events in memory affect the judgment of frequency
Representative Heuristic
The belief that even small samples should be representative of the population. People also think that the recent past is indicative of the future. “Gamblers Fallacy”
Flavors of Representativeness
Gamblers fallacy, excessive extrapolation, and regression to the mean
Examples of Heuristics
Compromise, availability, representativeness, anchoring and affect
Confirmation bias
the tendency to search for, interpret, and recall information in a way that confirms one’s preexisting beliefs
Regret aversion
taking action and losing feels worse than doing nothing and losing
Hindsight bias
People overestimate their ability to predict an outcome that could not possibly have been predicted. “I knew it all along”
Bias examples
optimism, confirmation, overconfidence, regret aversion, the illusion of control and hindsight
Risk aversion insure large or small amounts?
Large
Three things said about Loss aversion
Small amounts of risks are aversive, framing and aggregation matters
The sign effect
gains are discounted at a higher rate than losses
Magnitude effect
small outcomes are discounted more than large ones
Temporal framing effect
greater discounting in delay than expedite
Resource independence
discounting utility or discounting different resources differently
Discounting time
Individuals perceive more slack in the future than in the present, creating high discount rates for time
Discounting money
individuals perceive more equal slack in future and in present creating low discount rates for money
