psychology of choice

Question 1

types of choices

Answer 1

· People choose if they are told to choose!
- Nisbett, R. E., & Wilson, T. D. (1977). Telling more than we can know:Verbal reports on mental processes. Psychological Review, 84(3), 231–259.
· Reducing uncertainty
- Diagnostic hypothesis testing
- Prediction
· Choosing between alternatives
- Rational vs. irrational decision-making

Question 2

Normative/prescriptive models:

Answer 2

· “Rational” = selecting optimally
· What gets optimised?
- Expected Value: Highest resource value (e.g., money) = objective value * probability
- Expected Utility: Highest psychological value (e.g., reducing risk or uncertainty) = subjective utility * probability

Question 3

An alternative to EUT - prospect theory (a descriptive theory):

Answer 3

· Kahneman & Tversky (1979)
· Model
- Editing – selecting desired outcomes against a reference point via heuristics (availability, anchoring, representativeness)
- Evaluation – Value judgement based on calculation of anticipated utilities x probabilities
· Loss aversion
- Faced with a risky choice leading to gains, individuals are risk-averse, preferring solutions that lead to a lower expected utility but with a higher certainty
- Faced with a risky choice leading to losses, individuals are risk-seeking, preferring solutions that lead to a lower expected utility as long as it has the potential to avoid losses.
· Probability weighting
- People attribute excessive weight to events with low probabilities and insufficient weight to events with high probability.

Question 4

Heuristics and biases - representativeness:

Answer 4

· Tversky & Kahneman (1983)
· Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations. Which is more probable?
A) Linda is a bank teller.
B) Linda is a bank teller and is active in the feminist movement.
· 80% choose B à Conjunction fallacy

Question 5

Heuristics and biases - anchoring:

Answer 5

• Results = mean repayments higher by 70% without the minimum payment: £99 vs £175

Question 6

Hypothesis testing and pseudodiagnosticity

Answer 6

• bayes theorem = island B red glaze is the rational choice
• Mynatt and Doherty (1977) = majority of participants choose island A blue clay
• Pseudodiganosticity - belief that more information about current hypothesis is the most diagnostic choice

Question 7

Standard task:

Answer 7

• people typical choose Bet A, but sell bet B for a higher price -> preference reversal
• Litchenstein and Slovic (1971)

Question 8

Testing prospect theory:

Answer 8

· Prospect theory explains preference reversal as:
· Loss aversion –choosing a low number gives a perceived greater certainty of gain, but selling a high number gives a greater perceived risk of loss
· Anchoring – precise numbers determine the degree to which people value the utility of each bet
· Test of Prospect theory
· Ball, L. J., Bardsley, N. O., & Ormerod, T. C. (2012). Do preference reversals generalise? Results on ambiguity and loss aversion. Journal of Economic Psychology, 33, 48-57.

Question 9

Ball et al manipulations:

Answer 9

selling treatment:
- in the part of the experiment we would like you to tell us how much you would be willing to sell a lottery ticket for.

gift treatment:
- in this part of the experiment we would like you to tell us how valuable a lottery ticket is to you

Question 10

Ball et al results:

Answer 10

· Results
- Classic effect of preference reversal replicated
- No effect of transparency of bet values à not an anchoring effect
- No effect of selling vs. gift treatment à not a loss aversion effect
· Where does this leave Prospect theory?
- Preference reversal may result from switching between System 1 and System 2 processes