theoretical perspectives to RTB lect 6 Flashcards
what is theoretical perspective 1
decision making under uncertainty and risk
uncertainty and risk traditionally…
were separated by theories
what is the difference between risk and uncertainty
decisions under risk: outcome probability is known
decisions under uncertainty: outcome probability is unknown
how are decisions made in uncertainty
based purely on decision makers attitude towards the unknown
how can decision makers vary according to perspective 1
they can be optimistic, pessimistic and least regretful among others
-both optimists and pessimists contribute to society
-e.g optimists invented aeroplane and pessimists invented the parachute
decisions under risk and uncertainty currently
we do not separate decisions under risk and uncertainty
what are the 2 major clusters of decision making under risk and uncertainty
NORMATIVE
-top down
-always look at rational logical option
-expected utility theory (EUT)
DESCRIPTIVE
-bottom up
-attempt to identify mechanisms
-prospect theory (PT)
normative expected utility theory
-in economics, decision making made mathematically within EUT
-EUT proposed by Bernoulli 1738
-problem: how much a rational indiv is prepared to pay to enter a gamble
-most common conception was gamblers would pay expected moneytry value of gamble but no more
-bernoulli argued gamblers are prepared to pay some money for this type of gambling: St petersburg gamble
Newmann and Morgenstern
-considered same problem as bernoulli and developed the EUT
-proposed axions based on the assumption indiv are rational and have preferences
-once assumptions are satisfied, preferences can be represented by quantitative and measurable values of utility functions (rationally tell people what decisions to make)
-value of utility = measure of happiness, gratification, or satisfaction derived from behaviour
-decision makers aim to maximise utility (money and status)
critique of the EUT
-preference reversal: decision makers behaviour NOT consistent when choices were presented in moneytary value (slovic)
-ellsberg paradox: decision makers influenced by extra info shifting preferences from certain case to uncertain one without change in probabilities or winning prizes (ellsberg)
normative characteristics
-express how people should behave when confronting risky situations
-EUT proposed behavioural models based on rationality of decisions
-does not care how people behave in real life
-utility function is well defined
-NOT proposed models for fear disappointment and other emotions
what is theoretical perspective 2
prospect theory (PT) by Kahneman and Tversky
features of PT
-people do not need to maximise their utility like the EUT
-assumes probability of loss/gain is 50/50 and gain is generally perceived as greater
-losses cause greater emotional impact than equivalent amount of gain
-PT considered most influential theory in field
why is every choice in PT modelled as a 2 phase process
-instead of all available info, people use 2 step process to narrow down most important info
1. editing: mental shortcuts (heuristics) to assess important info and decide which outcomes are most desirable
2.evaluation: weigh up probability of each outcome and take actions based on perceived likelihood and desirability of each outcome NOT ALL DECSIONS ARE RATIONAL
kahneman and tversky PT research
-most people would prefer to win £50 with certainty than taking uncertain risk of winning £100 or nothing
-when pp presented with 100% chance of losing £50 vs 50% chance of no loss or £100 loss, pp choose second option
how is PT used that EUT cannot capture
-resolves biases in people’s thinking that EUT cannot
PT research certainty effect
-people tend to overweight options that are certain and risk averse for gains
-about 80% choose certain option
-people rather a small but certain reward
-e.g in marketing people reward those who subscribe to mailing list with… % off
OR free shipping when spending £X or more
-customers see value in proposition so persuaded to purchase more
PT research isolation effect
-multiple stimuli presented
-stimulus that differs from the rest is likely to be remembered
e.g when designing a website you can make customers pay attention to what they want them to see by using shapes, colour, font, size etc
PT research lost aversion
-pain of losing something is twice as powerful as the pleasure of gaining
-science magazine 2006:
-pp handed £50 at beginning and given 2 options:
1.keeping £30
2.gamble whole lot with equal chance of keeping or losing full amount
-57% decided to keep the £30
-then asked pp either
1. lose £20 of original £50
2. gamble all with equal shot of keeping full £50 or losing full £50
-61% gambled all £50
(researchers put word lose into choice even though game hadn’t changed- idea of losing £20 was more painful than keeping £30)
PT in real life
-loss aversion is reason we see phrases like ‘last chance to buy’
-incorporates fear of missing out by creating urgency and scarcity
-limited offers/coupons
-sending push notifications
-offer free trials
tversky and kehneman systematic pattern of thinking and cognitive biases
-biases impact how we buy, sell, think, feel, interact etc
-most common cog bias is the framing effect
-people react to choice depending on how it is presented
positive framing study
-one group of pp choose between 2 programs designed to combat disease expected to kill 600
-if A adopted, 200 saved
-if B adopted, 1/3 probability 600 will be saved and 2/3 probability no one will be saved
negative framing study
-program A, 400 will die
-program B, 1/3 probability no one will die and 2/3 probability that 600 will die
findings of positive and negative framing study
-pp tended to choose more sure option (A) when phrased positively
-program B chosen when negatively framed
-choices involving gains = risk averse
-choices involving losses = risk seeking
examples of pos and neg framing in real life
yogurt pots
-one label = 10% fat
-another = 90% fat free
-framing will lead us to choose second option
types of frames
-auditory frames: given 2 options, be sig influenced by how they are asked e.g shouting, deep agg tone
-visual frames: colour, imagery, font size/style, body language
framing evidence
-when presented with 2 or more options but outcome is the same
-options are worded differently so they appeal to out biases
-value options are framed positively
-choose options with higher numbers as we think higher is better
critique of PT and framing
-lacks psychological explanation (human emotional and affective responses that are important in decision making are absent in the model)
-utility function remains vague
-framing theory doesnt explain when we encounter competing frames
-Rossiter:
PT borrowed from psychology , not clearly acknowledged
does not invest in info processing
unethical to ask consumers to select one side presentation of info
PT requires mathematical ability
