ppts Flashcards
1
Q
what is decision making? (4 components)
A
-Choosing between alternatives/options
-In order to take (no) action
-to reach a certain objective
-in the face of a problem or opportunity
2
Q
what is a programmed decision
A
mental shortcut established in advance to cope with recurrring problems/opportunities. Routines, habits, patterns.
3
Q
decision making challenges:
A
-unclear information
-cognitive limitations to process information
-focussing on certain aspects of information
-looking for patterns and making connections
4
Q
types of decision making
A
individual solo, individual dependent and group
5
Q
what is the difference between the types of decision making
A
solo: individual choice. Dependent: Individual choice influenced by others. Group: choice made together with others.
6
Q
what are economics?
A
the study on how people (individuals) choose to use their scarce resources in an attempt to satisfy their unlimited demands (what choices they make)
7
Q
how do people choose according to economics?
A
People choose that what is the best in their own interest
They weight the pros and cons (benefits and cost) and determine which choice is best for them
8
Q
most basic, orthodox rational choice:
A
Weighing monetary costs and benefits, choosing that option with the highest (best) financial outcome/ utility
9
Q
thin model of rational choice
A
applying the most basic idea of rational choice to all realities
10
Q
ideas of thick rational choice models
A
1.ignoring
2. monetize non-monetary values
3. utility
4. Individual weighing process/utility
11
Q
what is utility
A
a term used to determine the worth or value of a good or service: the total satisfaction or benefit derived from consuming a good or service
* Utility is the idea of quantitively measuring economic value
12
Q
ordinal utility
A
the concept of one good being more useful or desirable than another (qualitative, ranks)
13
Q
what is a preference
A
A preference is a technical term usually used in relation to choosing between alternatives; someone has a preference for A over B if they would choose A rather than B
14
Q
which approaches fall under rational choice?
A
any of a number of individual approaches that use the rationality assumption
15
Q
difference thin and thick RC
A
thin: only monetary costs and benefits, all info available, focus on individual and no social aspects.
thick: any costs and benefits, not all info available, social aspects included.
16
Q
what is statisficing?
A
making a choice without being able to know all information within the time available. Statisficers pick an options that is good enough for them. Opposite are maximisers who always want the best option.
17
Q
are the basic assumptions different for thin and thick RC models?
A
no
18
Q
difference between strictly and weakly preferred
A
strictly: A is better than B, and B is not better than A.
weakly: A is at least as good as B
19
Q
when is a preference complete
A
if you can say what the relationship between the options is (A≥B, B≥A, A>B, B>A or A≡B)
20
Q
what is an incomplete preference and how to solve it?
A
If you do not know what the relation is between the options (which you prefer over which). Can be solved by experiences, trusting other or relating to another experience.
21
Q
what is a transitive preference
A
if it holds for all elements A, B, and C of its domain that if A>B and B>C, then A>C.
22
Q
when is there no transitivity?
A
with insufficient discrimination (example of a 100 coffee cups where you add one extra grain in each cup, so you don’t taste the difference between cup 1 and 2, but it’s not transitive because there is a difference between 1 and 100)
23
Q
basic assumptions of RC
A
-People have preferences
-These preferences are complete
-These preferences are transitive
24
Q
when is an alternative uniquely best?
A
only if it is better than all other alternatives. if there is one you choose it.
25
when is an alternative among the best?
if it is at least as good as all other alternatives. If there are alternatives that are among the best, you pick one of them
26
ordinal preference
A > B, but A is not x times better than B
27
numerical preference
A is x times better than B
28
why is the thin RC model valuable?
you can predict what will happen. You can generate clear hypotheses from clear assumptions.
29
which models falls under individual solo DM
(bounded) RC, Behavioral economics, sensemaking
30
which models fall under individual dependent DM
Sensemaking, game theory
31
which models fall under group DM
collective action, political decision making
32
what does a high discount rate mean for how you value the future?
the higher the discount rate, the more you value the present
33
what are two dimensions of risk?
the likelihood of the occurrence of a bad event, and the consequence of it.
34
what is probability
a way of expressing knowledge or belief that an event will occur or has occurred.
35
what is the difference between risk and uncertainty (according to Keynes and Knight)
with risk, probabilitites are known and available to humans. with uncertainty probabilites are unknown and hence unavailable.
36
how to estimate probabilities
use historical data to assess reasonable probabilities, and use a model (that you know is inadequete but may be good enough for the purpose)
37
cromwell's rule
basically nothing 100% probable. you should never assigns values of 1 or 0 to probability, unless you can demonstrate by absolute logic for it to be true/false
38
what is bayesian probability/ subjective probability
interpreting the probability as representing belief or knowledge, instead of a frequency-based interpretation
39
what is a risk intelligence quotient
a measure of a persons ability to estimate probabilities acurately
40
three classes of decision theory
decision under certainty, uncertainty and risk.
41
decision under certainty
assumes we know precisely what the future states of nature will occur at the time we choose the action. If you know state of nature A will occur, then you can know you have to take action B to maximise utility
42
decisions under uncertainty
when you don't have any idea which future will occur at the time you make the decision.
43
decisions under risk
when you're able to estimate or assign occurrence probabilities to each state of nature. Then you can use calculations to help guide the decision.
44
states of nature
packages of future factors affecting outcomes (for example, many seeds present, few seeds present)
45
decision making under uncertainty: rationalist
all states of nature are equally likely, so you pick the one with the higest net return for equal likelihood of states
46
decision making under uncertainty: optimist/pesimist
Optimist picks the state (and action) with highest return, pessimist picks actions which minimizes losses when worst state of nature happens
47
decision making under uncertainty: politician or administrator
worries most about recriminations, wants to minimize the 'regret', the the difference between the return from the best possible decision for a given state of nature and the return from the action taken.
48
how are views of reality a challenge for RC theories
actions are determined by perceptions, not facts. Individuals construct their own realities which is different for each, leading to different decisions in the same situation
49
how are preferences and utility a challenge for RC theories
you assume you know what someone wants, but there can be different/multiple preferences and utilities
50
how are views of reality a challenge for RC theories
51
how is sociality a challenge for RC theories
with RC, you focus on the individual, but actions are always embedded in social, cultural, political etc. structures. You can deal with this by excluding them, or with for example institutional economics
52
how self interest a challenge for RC theories
RC can be seen as dehumanizing and inaccurate, because humans don't always act in their own self interest.
-People can have enlightened self interest
53
how is corporeality a challenge for RC theories
There is the assumption is that actor exercises effective control over the body
-But people can't always be in control, e.g. falling asleep/emotional situations.
(every decision making model has this problem)
54
institutional economics
-empasize importance of institutions, describe or explain instituion and analyze changes herein.
-evaluate impact on (rational) decision making
-consider transactional costs- costs caused by interactions with others (eg. to enforce instituions)
55
enlightened self interest
a person acting in the interests of
others ultimately serves their own self-interest
56
how is theory vs practice a challenge for RC theories
there is a gap between theory and practice
57
how to solve the theory vs practice problem
1. Deviations are “cognitive anomalies”
2. (Thin) RC works best in specific situations (e.g. with economic actors/in the private sector, with top level policy makers)
3. Expanding assumptions (adjusting thin RC models)
4. Come up with alternatives
58
what is sensemaking
-all activities and processes with which an actor constructs meaning and reality of situations as a frame for individual decision-making
-includes the constructing and bracketing of cues that are interpreted, and revision of those interpretations based on action and consequence
-ongoing process
59
basic principles of sensemaking
-You are faced with an uncertain situation
-You do not know what to do
-You develop/build a “frame of understanding”
= you make sense of the situation
-This frame allows you to decide and take action
60
7 core elements of sensemaking
1. Grounded in identity construction
2. Retrospective: comparing with past
3. Enactive of the environment
4. Social activity: connects own experience to experience of others
5. Ongoing: iterative process leading to action and feedback
6. Extracting cues: noticing and bracketing social and environmental cues to build up a plausible frame for action
7. Driven by plausibility rather than accuracy
61
what is sensemaking compared to RC
an alternative
62
Main tenets of neoclassical rational choice theory
Self-interest
Profit maximization
Full information
63
Main motivations for behavioral economics
apparent weaknesses in standard RC theory:
People sometimes make choices that are difficult to explain with standard RC theory
64
objective of behavioral economics
to modify, supplement and enrich RC theory by adding insights from psychology;
-Suggesting that people care about things standard theory typically ignores, like fairness or status
-Allowing for the possibility of mistakes
65
what is the prospect theory
Prospect theory posits that a loss is more significant than the equivalent gain, that a sure gain is favored over a probabilistic gain, and that a probabilistic loss is preferred to a definite loss. One of the dangers of framing effects is that people are often provided with options within the context of only one of the two frames.
66
Availability bias
Individuals assess the likelihood of events based on how easily they can recall similar instances from memory, rather than on actual probability.
67
Anchoring
tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions.
68
Representativeness Bias
make judgments about the likelihood of an
event based on how similar it is to a typical example or how well it fits a particular category, rather than on statistical probabilities.
69
Loss aversion Bias
People tend to strongly prefer avoiding losses
over acquiring gains of similar value.
70
Reference point Bias
People evaluate outcomes relative to a
baseline / starting point / reference point rather than in absolute terms
71
Risk aversion Bias
tendency to prefer certainty over uncertainty;
people are generally more willing to accept a guaranteed outcome, even if it has a lower expected value, than to take a gamble with potentially higher payoffs but also the risk of losses.
72
Framing effect
Decisions are influenced by how information is presented or framed, leading to different outcomes even when the underlying information is the same.
73
Endowment Effect
People assign higher value to things they
own or possess compared to identical items they do not own, leading to irrational attachment and reluctance to trade.
74
Planning Fallacy
tendency to underestimate task-completion
times
75
Hindsight Bias
After an event occurs, people tend to perceive
the event as having been predictable or inevitable, leading to an overestimation of their ability to have predicted the outcome
beforehand.
76
Confirmation Bias
Individuals tend to seek out information that
confirms their pre-existing beliefs or hypotheses while ignoring contradictory evidence.
77
Status Quo Bias
Individuals have a preference for maintaining their current situation or decision, even when better alternatives are available.
78
Social Norms Bias
tendency of individuals to conform to
social norms or expectations, even when those norms may not align with their personal beliefs or preferences.
79
Selective perception
Expectations affect perception
80
what is an important difference between behavioral economics and standard economics
the use of experiments using human subjects, behavioral economists tend to use experimental data rather than real world data
81
advantages of experimental data
-Easier to determine if people’s choices are consistent with standard economic theory by ruling out alternative explanations
-Researchers can double-check their
assumptions and conclusions by testing and debriefing subjects
-Often possible to obtain information that is not available in the real world
82
disadvantages of experimental data
-Decisions made in the lab differ from in the real world
-Introduce influences on decision-making that are hard to measure or control (Strong evidence that subjects often try to conform to what they think are the experimenter’s expectations)
-Most subjects are students, thus not
representative of general population and inexperienced at making economic decisions
-Scale of any experiment is limited by the
available resources
83
critique of BE
-it's not nearly as realistic as it claims to be, and it focuses on which decisions are taken, not how decisions are taken.
-it's not precise, there are biases in tests and samples and aspects are ignored (cultural setting etc.)
84
what are the three crucial elements to Ostroms framework
Reciprocity, reputation and trust
85
how does Ostroms framework work
If you do something for someone, you can expect they will also help you. This is Reciprocity. They might not, but that would harm their Reputation. If they do, Trust is build up, which leads to more Reciprocity and so on. This leads to institutions being formed, where the three factors are turned into norms and rules.
86
what are structural variables according to Ostrom
Factors that affect the ease of institution building: group size, homogeneity of group, costs of institution building and time horizon
87
what is game theory used for
Used in multiple social sciences (especially economics), to (mathematically)
explain behaviour in strategic situations
88
what is a strategic situation
when the outcome of an individual’s choice depends on the choices of others
89
Can game theory also be used to understand outcomes of situations where no one is overtly making decisions?
yes, e.g. in evolutionary biology (hawk-dove game)
90
what are the 'ingredients' of a Game in game theory
-Players (2 or more),
-strategies for each player,
-payoffs for each player (results for each player, which depends on the strategy selected by all players)
91
why is chess a game theory but snakes and ladders isn't?
Chess is strategic: your outcomes/payoffs depend on moves of your opponent
Snakes and ladders, the outcome is based on chance and outcomes are independent
92
assumptions of game theory
1. Assume that everything a Player cares about is summarized in their potential Payoffs
2. Assume “Common Knowledge” (Each Player knows who all the Players are, the potential Strategies of each player, and their potential Payoffs)
3. Assume “Rationality”
-Each Player wants to maximize their own payoff and is skilled in being able to select their optimal strategy
93
what is a payoff matrice
a way of visualizing and analyzing the Players, Strategies and potential payoffs of a Game, also called normal-form presentation.
94
what is a game tree
a way of visualizing and analysing dynamic games, a.k.a. Extensive-Form representation, or Decision Trees.
95
what is a dynamic game in game theory
Players make moves sequentially,
i.e., Player 1, then Player 2, etc
96
can dynamic games also be analysed using payoff matrices
yes, but this quickly gets complicated
97
what is a best response in game theory
If there are no other strategies that player could select which would give them a higher payoff (in response to the other player’s
strategy). There can be more than one.
98
what is a strict best response in game theory
if all the other potential strategies would give a lower payoff for that player, in response to the strategy of the other player
99
what is a strictly dominant strategy in game theory
a strategy which gives a best response to every strategy of the other player
100
what is a dominant strategy in game theory
a strategy which gives at least a best response to every strategy of the other player
101
what is a nash equilibrium
If the strategies of different players are best or strictly best responses to one another, this combination of strategies together are a Nash
Equilibrium. No player has incentive to choose a different strategy.
102
what is a social optimum in game theory
a choice of strategies that maximize the sum of the player’s payoffs
103
what is optimality in game theory
how efficient the game is, from a 3rd person perspective rather than a players. The players do not care about optimality (because of the assumption they only care about maximizing payoff).
104
pareto optimal
when no Player could get a better payoff, without the other Player(s) getting a worse payoff
105
pareto dominated
if there is another outcome where one or more players receive a better payoff, without any player receiving a worse payoff
106
what is the relationship between social and pareto optimums
social optimum is always pareto-optimal, but pareto-optimal does not have to be social optimum
107
what are politics
collecitve decision making by a (leaders/representatives/members of a) community in a give territory, which is (legally, morally, financially) binding upon it
108
what is politics about
everything a community 'needs', that can't or shouldn't be produced or granted by individual members of that community
109
public choice model assumption
CR for politics kind off, rational political actor ranks political alternatives and chooses the alternative with the best individual payoff for them (like re-election, popularity etc.)
110
tripple I model
critical perspective on public choice model. Based on: Ideas, Interests and Institutions which affect each other.
111
what is the policy cycle process
part of the tripple I model, the cycle of agenda setting --> policy formation --> policy implementation --> evalutation and if outcome not good, cycle starts again
112
three models of democracy according to Teorell
responsive (influencing attempts), participatory (direct decision making) and deliberative (political discussion)
