thinking lectures 3 and 4 Flashcards
what are two types of models?
descriptive models
normative models
what is a descriptive model?
model of how decision processes operate, regardless of the outcome being good or bad
what are normative models?
evaluate a decision in terms of the goals of the decision maker- decision is good if it reaches the goal
what makes a good decision?
enables the decision maker to reach their goals
maximises the expected value
choose the option with the highest utility
what are the assumptions made when decision making?
agent has full access to alternatives
knows the probability of their outcomes
knows the value of their outcomes
what is rational choice theory?
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
what are the features of bounded rationality?
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
how do we make choices under uncertain conditions?
choose the outcome with the highest utility
what is the equation for uncertainty- expected value?
expected value=p(outcome)*value
what is the St Petersburg paradox?
-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)
what happens with the St Petersburg Paradox?
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
what does marginal declining utility mean?
the phenomenon that each additional unit of gain leads to an ever-smaller increase in subjective value
what did Bernoulli suggest about marginal declining utility?
expected value doesn’t equal expected utility
what is the utility of wealth proportional to?
its logarithm
how can marginal declining utility explain the St Petersburg Paradox?
extra utility of the high winnings is no longer high enough to compensate for the very low probabilities
how does expected utility theory suggest that we make choices?
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
what is weak ordering?
for a set of choices, we must say we prefer one over the other or neither
what is transivity?
choices must be logical
what did Kahneman and Tversky investigate?
risk seeking vs risk adverse behaviour
did people prefer a certain gain of £3000 or 80% chance of gaining £4000, if not nothing?
certain gain of £3000
did people prefer a certain gain of £5 or a 1/1000 chance of gaining £5000?
1/1000 chance of gaining £5000
did people prefer an 80% chance to lose £4000 (otherwise nothing) or a certain loss of £3000?
an 80% chance to lose £4000
did people prefer a certain loss of £5 or a 1/1000 chance of losing £5000?
certain loss of £5000
what did Kahneman and Tversky find out about risk taking behaviour?
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
who proposed prospect theory?
Kahneman and Tversky
what is prospect theory?
model of decision making
accounts for deviations from rational choice theory
people make decisions based on perceived losses or gains
what is the value function?
function which differs for gains and losses
