theoretical perspectives to RTB lect 6

Question 1

what is theoretical perspective 1

Answer 1

decision making under uncertainty and risk

Question 2

uncertainty and risk traditionally…

Answer 2

were separated by theories

Question 3

what is the difference between risk and uncertainty

Answer 3

decisions under risk: outcome probability is known
decisions under uncertainty: outcome probability is unknown

Question 4

how are decisions made in uncertainty

Answer 4

based purely on decision makers attitude towards the unknown

Question 5

how can decision makers vary according to perspective 1

Answer 5

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

Question 6

decisions under risk and uncertainty currently

Answer 6

we do not separate decisions under risk and uncertainty

Question 7

what are the 2 major clusters of decision making under risk and uncertainty

Answer 7

NORMATIVE
-top down
-always look at rational logical option
-expected utility theory (EUT)
DESCRIPTIVE
-bottom up
-attempt to identify mechanisms
-prospect theory (PT)

Question 8

normative expected utility theory

Answer 8

-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

Question 9

Newmann and Morgenstern

Answer 9

-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)

Question 10

critique of the EUT

Answer 10

-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)

Question 11

normative characteristics

Answer 11

-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

Question 12

what is theoretical perspective 2

Answer 12

prospect theory (PT) by Kahneman and Tversky

Question 13

features of PT

Answer 13

-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

Question 14

why is every choice in PT modelled as a 2 phase process

Answer 14

-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

Question 15

kahneman and tversky PT research

Answer 15

-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

Question 16

how is PT used that EUT cannot capture

Answer 16

-resolves biases in people’s thinking that EUT cannot

Question 17

PT research certainty effect

Answer 17

-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

Question 18

PT research isolation effect

Answer 18

-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

Question 19

PT research lost aversion

Answer 19

-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)

Question 20

PT in real life

Answer 20

-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

Question 21

tversky and kehneman systematic pattern of thinking and cognitive biases

Answer 21

-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

Question 22

positive framing study

Answer 22

-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

Question 23

negative framing study

Answer 23

-program A, 400 will die
-program B, 1/3 probability no one will die and 2/3 probability that 600 will die

Question 24

findings of positive and negative framing study

Answer 24

-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

Question 25

examples of pos and neg framing in real life

Answer 25

yogurt pots
-one label = 10% fat
-another = 90% fat free
-framing will lead us to choose second option

Question 26

types of frames

Answer 26

-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

Question 27

framing evidence

Answer 27

-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

Question 28

critique of PT and framing

Answer 28

-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