Thinking about decisions (Week 1)

Question 1

What is the principle of rational choice theory?

Answer 1

Maximise utility

Question 2

What is the principle of bounded rationality?

Answer 2

We want to be rational but we have limited capacity

Question 3

What is model decision behaviour?

Answer 3

Behaviour can be predicted by certain things
E.g. Biases can be predictable
Prospect Theory

Question 4

What are the levels of analysis for decision-making?

Answer 4

1) NORMATIVE
- What constitutes “rational behaviour”?
i. e. What does it mean to maximise self-interest?

2) DESCRIPTIVE
- What kinds of judgments and decisions do people actually make in practice?
E.g. Ppl may have biases - escalation of commitment

3) PRESCRIPTIVE
- How can ppl go about making higher quality decisions?

Question 5

Why aren’t people fully rational?

Answer 5

• Inherent limitations of attention, memory
• Mental shortcuts can lead us astray
• Contamination by automatic processes that we cannot suppress (System 1, intuition vs. System 2, analysis)

Question 6

What are the two systems of thought?

Answer 6

1) Intuitive
- Fast, effortless, associative, automatic, unconscious

2) Analytical
- Slow, effortful, serial, controlled, conscious
- More complicated decision rules

Ideally, System 2 monitors the output of System 1

Question 7

What are the benefits of studying decision behaviour?

Answer 7

1. Anticipate biases in your own decision-making and make more optimal decisions
   - Identifying biases during daily decision-making
   - Exploring a wide range of possible options
2. Anticipate biases in others’ behaviour
   - Evaluating others’ motivation, behaviour & perf.
   - Predicting & managing others’ needs & behaviour
3. Change your thinking processes to achieve happiness & success
   - Trad. thinking: Need to be successful to be happy
   - Actual: Reverse - Better outcomes (i.e. success) occur when we’re feeling +ve/happy

Question 8

What makes decisions difficult?

Answer 8

1) Complexity - a lot of options
2) Uncertainty - better/worse outcome?

3) Conflict/Trade-offs
- want to optimise our utility but we are also compromising, e.g. good quality but not too high px

4) Multiple stakeholders - others infl. your decisions
5) Time constraints

Question 9

How should we evaluate decisions?

Answer 9

• Outcome? (Only in the long run/repeated decisions)
• Quality of thinking
  > Does it properly a/c for most of available options?
  > Does it properly a/c for uncertainty?
  > Is it based on sound decision rules?
• Efficiency (time, resources consumed)
• Effect on subsequent decisions
  > Is there option value? Was there learning?

Question 10

What is option value?

Answer 10

The value associated with a private willingness to pay for maintaining a public asset/service

E.g. Building a zoo has option value b/c businesses are willing to sponsor animals’ food

Question 11

What are the attributes of good decision makers?

Answer 11

1. Decisive - faster DM process
2. Adaptive
   - Able to change DM strategies depending on situation/
   external demands
3. Seek advice/info
   - Good DM considers more info to make better/more precise decisions
4. Deliberate process
5. Intuition + Science
   - Intuition: From previous exp, stable preferences
   - Science: Use systematic way to approach qn