thinking lectures 3 and 4

Question 1

what are two types of models?

Answer 1

descriptive models
normative models

Question 2

what is a descriptive model?

Answer 2

model of how decision processes operate, regardless of the outcome being good or bad

Question 3

what are normative models?

Answer 3

evaluate a decision in terms of the goals of the decision maker- decision is good if it reaches the goal

Question 4

what makes a good decision?

Answer 4

enables the decision maker to reach their goals

maximises the expected value

choose the option with the highest utility

Question 5

what are the assumptions made when decision making?

Answer 5

agent has full access to alternatives

knows the probability of their outcomes

knows the value of their outcomes

Question 6

what is rational choice theory?

Answer 6

assumes the individual has access to all alternatives

knows the probability of their outcomes

knows the value of their outcomes

integrates information to choose the option with the highest utility

Question 7

what are the features of bounded rationality?

Answer 7

rational behaviour has its limits, which are based on the knowledge the person making the decision has at the time

limited cognitive capacity

limited information on outcomes

human behaviour can be impulsive and random

Question 8

how do we make choices under uncertain conditions?

Answer 8

choose the outcome with the highest utility

Question 9

what is the equation for uncertainty- expected value?

Answer 9

expected value=p(outcome)*value

Question 10

what is the St Petersburg paradox?

Answer 10

-peter tosses a coin and continues to do so until it lands on heads

-agrees to give one ducat to paul if he gets heads on the first throw, two ducats if he gets it on the second throw, four on the third throw etc

-(doubles the number of ducats per additional throw)

Question 11

what happens with the St Petersburg Paradox?

Answer 11

expected value of the gamble is infinite

suggests a player should be willing to pay any sum of money, according to Rational Choice Theory

chance to win a high value is quite low, so people don’t necessarily choose this option

Question 12

what does marginal declining utility mean?

Answer 12

the phenomenon that each additional unit of gain leads to an ever-smaller increase in subjective value

Question 13

what did Bernoulli suggest about marginal declining utility?

Answer 13

expected value doesn’t equal expected utility

Question 14

what is the utility of wealth proportional to?

Answer 14

its logarithm

Question 15

how can marginal declining utility explain the St Petersburg Paradox?

Answer 15

extra utility of the high winnings is no longer high enough to compensate for the very low probabilities

Question 16

how does expected utility theory suggest that we make choices?

Answer 16

expected utility of a particular choice is situationally dependent

depends on the values people individually assign to a situation

maximising expected utility may not always align with maximising monetary gains

Question 17

what is weak ordering?

Answer 17

for a set of choices, we must say we prefer one over the other or neither

Question 18

what is transivity?

Answer 18

choices must be logical

Question 19

what did Kahneman and Tversky investigate?

Answer 19

risk seeking vs risk adverse behaviour

Question 20

did people prefer a certain gain of £3000 or 80% chance of gaining £4000, if not nothing?

Answer 20

certain gain of £3000

Question 21

did people prefer a certain gain of £5 or a 1/1000 chance of gaining £5000?

Answer 21

1/1000 chance of gaining £5000

Question 22

did people prefer an 80% chance to lose £4000 (otherwise nothing) or a certain loss of £3000?

Answer 22

an 80% chance to lose £4000

Question 23

did people prefer a certain loss of £5 or a 1/1000 chance of losing £5000?

Answer 23

certain loss of £5000

Question 24

what did Kahneman and Tversky find out about risk taking behaviour?

Answer 24

people prefer a certain option for gains, but a risky option when the outcome is a loss

changes when small probabilities are involved and extreme gains/losses

Question 25

who proposed prospect theory?

Answer 25

Kahneman and Tversky

Question 26

what is prospect theory?

Answer 26

model of decision making

accounts for deviations from rational choice theory

people make decisions based on perceived losses or gains

Question 27

what is the value function?

Answer 27

function which differs for gains and losses