Task 5 - Decision Making

Question 1

Cognitive illusions

Answer 1

errors of cognition that come about for understandable reasons and that provide information relevant to understanding normal functioning –> systematic biases

Question 2

Availability Heuristic

Answer 2

• Instances that are more easily thought of stand out more in one’s mind
• Own behaviours are more prevalent to us than that of others
• Failure to include base rate info in probability estimation

Question 3

Representativeness Heuristic

Answer 3

• Expectation that results are representative of the process that produced them (e.g. random process  random results)
• Failure to include base rate info
• Gambler’s fallacy - mistaken belief that if something happens more frequently than normal during a given period, it will happen less frequently in the future

Question 4

Framing Effect

Answer 4

• “Context effect” in decision making
• Changing the description of a situation can lead people to adopt different reference points –> see the same outcome as a gain in one stich and as a loss in another
• Description frames the decision (e.g. 2 gas stations)
• Treat losses more seriously than gains of the same amount (care more about losing than winning a dollar) –> loss aversion

Question 5

Anchoring

Answer 5

• Rely too much on an initial piece of information offered (= anchor) when making decisions

Question 6

Sunk Cost Effect

Answer 6

Greater tendency to continue something once one has invested in it (even though it doesn’t change the likelihood of future success)

Question 7

Illusory Correlation

Answer 7

• Seeing a relationship between variables even when there isn’t any
• Typically have some prior associations in peoples’ minds

Question 8

Hindsight Bias

Answer 8

• Tendency to exaggerate what could’ve been anticipated in foresight when looking back in hindsight
• Once you know how a decision has turned out, the events leading up to the outcome seem more inevitable than they really are

Question 9

Confirmation Bias

Answer 9

Only gather info consistent with initial hunch

Question 10

Omission Bias

Answer 10

• Tendency to prefer inaction to action when engaged in risky decision making
• Anticipated regret: greater when unwanted outcome caused by own actions rather than inaction

Question 11

Satisficing

Answer 11

• Simon
• Decision-making strategy that aims for a satisfactory or adequate result, rather than the optimal solution
• When confronted with a ton of choices for a specific need, will select a product or service that’s “good enough” rather than expending effort and resources on finding the best possible or optimal choice

Question 12

Normative models 
(Utility models)

Answer 12

define ideal performance under ideal circumstances

Question 13

Prescriptive models 
(Utility models)

Answer 13

show how we ought to make a decision (= consider that circumstances aren’t ideal and show how to best decide)

Question 14

Descriptive models 
(Utility models)

Answer 14

simply detail what people actually do when they make decisions (= actual performance)

Question 15

Expected Utility Theory

Answer 15

Normative model: there’s no better way of choosing among options that in the long run will increase overall satisfaction than using EU

Question 16

Limitations

Expected Utility Theory

Answer 16

• Calculation of EU difficult as info about several aspects of the decision must be integrated (various factors and goals)
• Provides an account only for making the final selection from a set of alternatives, not of making decisions in which one faces the “status quo vs. make a change” option
• Doesn’t describe processes by which people structure a decision (= gather info and lay out possibilities & parameters)

Question 17

Multi-Attribute Utility Theory (MAUT)

Answer 17

1. Break a decision into independent dimensions
2. Determine the relative weights of each dimension (= their value – subjective!)
3. List all alternatives
4. Rank the alternatives along the dimensions
5. Multiply ranking by the weighting of each alternative to determine final value
6. Choose alternative with highest value

• Assumes that a person would be willing to choose an alternative that was not highest on the highest ranked dimension when the relative position on other dimensions compensates for that

Question 18

Limitations

Multi-Attribute Utility Theory (MAUT)

Answer 18

• Elimination by aspects (descriptive model) – when decision makers have too much info to deal with they don’t take all dimensions into account but rather select one factor, pick a threshold value and everything that exceeds that threshold value is tossed (–> no compensation)
• – Nonoptional heuristic to reduce cognitive strain

Question 19

Bounded rationality (Thaler)
Descriptive Models

Answer 19

people are as rational as their processing limitations permit

Question 20

Image Theory

Answer 20

• People don’t formally structure decisions
• Most decision-making done during “pre-choice screening of options” phase
• – Boil down number of options under active consideration
• – Ask themselves whether a new goal/ plan/ alternative is compatible with 3 images
  1. Value image – decision maker’s values, morals, principles
  2. Trajectory image – goals & aspiration for the future
  3. Strategic image – way in which decision maker plans to attain his/ her goals
• Options judged incompatible with at least one of the images are dropped from further consideration  non-compensatory
• More than one survivor of pre-screening  go over to compensatory/ other strategy

Question 21

Recognition-Primed Decision Making

Answer 21

• Experts most likely rely on intuition, mental simulation, making metaphors/ analogies and recalling or creating stories when deciding
• – Time-pressured, high-stakes decisions
• Compare current situation to situation they’ve encountered before

Question 22

Prospect Theory – Kahneman

Answer 22

• Individuals identify reference point (subjective!), generally representing their current state
• -> In doing so they use heuristics (e.g. framing effects)
• Treat losses more seriously than gains of the same amount (care more about losing than winning a dollar)  loss aversion
• -> Greater emotional impact

Prospect theory predicts that people go through two distinct stages when deciding between risky options like these

Question 23

Constructivist Approach – Cultural Differences

Answer 23

• Emphasis on dynamics of schema activation & external features of social environments that play numerous roles in cultural patterns of judgements & decisions

Question 24

Other factors influencing decision making

Answer 24

• Self-other decision making
• Effects of self-construal priming on Risk-Taking
• Endowment Effect

Question 25

Self-other decision making

Answer 25

• Making choices for others involves less loss aversion than making choices for self
• Omission bias also greater for self
• Construal level (= psychological distance) – losses loom larger for distances that are short
• • With distance regulatory focus shifts from prevention focus to promotion focus
• Seek more info when making decisions for others
• When making decisions for others it gives us a feeling of power which makes us less sensitive to losses

Question 26

Effects of self-construal priming on Risk-Taking

Answer 26

• Everybody has 2 coexisting selves in their memory: one independent & one interdependent
• • Cultural differences stem from likelihood of sampling one or the other (depending on social role & situation)
• Consumers primed on an interdependent self are less likely to take social risks than those primed on independence
• Consumers primed on interdependence are more likely to take financial risks
• • Cushion hypothesis – social network acts as safety net
• • Activate in memory a higher number of friends/ family members & rate their relationships with those more positively
• THUS, friends & family members offer a cushion that lessens the effect of financial loss but magnify the embarrassment of a social misstep

Question 27

Endowment Effect

Answer 27

• The tendency for owners (potential sellers) to value objects more than potential buyers
• • Simply owning an object can enhance its perceived worth
• • Activates automatic association between object & self –> because of the intrinsic tendency to enhance the self, the self-object association boosts the objects perceived value
• Smaller effect for Asians than for Westerners (study 1)
• • Interdependent self-construal –> less positive regard for the self –> mere ownership of an object doesn’t elicit enhancement of its perceived value
• • Independent self-construal prime also increased endowment effect (study 2)
• Cultural differences in the effect emerged only when self-object associations were salient (otherwise they disappeared)
• Unlikely to be due to loss aversion as Asians tend to be more prevention focused & biased toward the status quo