Week 1 Flashcards
What are judgments?
(the process of) Attaching a qualitative/quantitative value to something.
Could be estimates, evaluations, opinions etc.
What are decisions?
Choosing between alternatives. Closely related to judgments.
What are normative models?
Describe how judgments and decisions should be made. Are logical in how you can achieve in what you want.
Developed by philosophers, mathematicians, classic economists.
What are descriptive models?
Describe how judgments and decisions are actually made.
Developed by psychologists.
What are prescriptive models?
Practical suggestions on designing judgment and decision-making processes based on normative and descriptive models.
What is predictably irrational?
Our judgments and decisions deviate from normative frameworks in a systematic way. People do not make normative decisions in real life.
What are humans well prepared for?
Humans are well prepared to make fast and simple decisions in a stable, predictable environment with relatively few homogeneous actors and to spend more energy than strictly necessary.
What are humans not well prepared for?
Humans are not well prepared to make complex economic decisions, in a dynamic, unpredictable environment with many heterogeneous actors. In this case we can’t simply ignore our human nature and follow a rational process.
What is dual process theory?
Human thinking/decision making is governed by two distinct cognitive processes: System 1 and 2
What describes system 1?
intuitive, fast, automatic, emotional, effortless, system of decision making.
When is system 1 used?
Used when we interpret verbal language, process visual information, walk, talk, etc.
What is system 1 not designed for?
System 1 is not designed for complex decision making, and it tends to make decisions that are suboptimal.
How is the relationship between system 1 and system 2?
Both systems are always on, but system 2 in low effort mode.
System 1 continuously provides system 2 with input
System 2 is only mobilized when System 1 runs into difficulties
This division of labor is highly efficient
What describes system 2?
Slow, effortful, conscious and explicit
You are aware of your own thinking, you are deliberately making a judgment or decision.
What is the central notion of dual process theory?
Accessibility
Things that come to mind easier are judged to be more likely, frequent, probable etc.
What kind of things come to mind effortlessly?
Perceptions and intuitions
What describes accessibility?
Our brain is easily satisfied and tends to jump to conclusions. Cognitive easy feels good cognitive dissonance is avoided.
Things that come to mind easier are judged to be more likely, frequent, probable etc.
What are heuristics?
Our first impulse is to find an easier accessible answer to a related question using system 1 instead of answering a difficult question (using system 2). We substitute a difficult question for an easier question.
What are the 4 main heuristics (Bazerman & Moore)
- Availability
- Representativeness
- Confirmation
- Affect
What is accessibility (heuristic)?
Things that come to mind easier are judged to be more likely, frequent, probable etc.
What is representativeness (heuristic)?
Things that are typical for their category are judged to be more likely, frequent, probable etc.
You compare situations to mental prototypes/stereotypes instead of statistical reasoning. EG Person with glasses reading book is doctor
What is confirmation (heuristic)?
Judgments are influenced by what we expect. We tend to interpret new information as confirming our existing beliefs.
What is affect (heuristic)?
judgments are affected by our emotional state or mood
What are two important normative models
Expected-utility theory (EUT)
Bayes’ theorem
What is the Expected Utility Theory (EUT)
Normative model about choosing between alternatives. Always choose alternative with highest expected utility.
No uncertainty? –> straightforward
Uncertainty? –> calculate highest expected utility
What is a starting point of normative models? (Baron 2004)
The simple idea that some outcomes are better than others. No claim about absolute truth, but “truth relative to assumptions”.
What is the formula for the expected utility?
Utility of outcome x Probability of outcome
What is utility?
What is being maximized, normative models tell us what we should be doing to maximize whatever we try to maximize (not what to maximize).
What are two core assumptions of comparing utility?
Transitivity: IF A>B & B > C –> A > C
Connectedness: A>B or A<B or A=B –> possible to compare A and B
What is the conclusion about expected utility theory?
It tells us which alternative we should choose given how we value outcomes and how we assess probabilities.
What is Bayes’ theorem?
Normative model for updating personal probabilities when we receive new information.
Applies as long as probabilities follow the principles of additivity and multiplication
What is additivity?
2 outcomes of event, both mutually exclusive.
P(A&B) = 0
P(A or B) = P(A) + P(B)
P(A) + P(not A) = 1
What is multiplication?
A and B not mutually exclusive P(A&B) <>0
P(A and B both true): P(A&B) = P(A|B)*P(B)
Outcomes are independent if knowing one does not tell you anything about the other.
What is the formula for Bayes’ theorem?
P(A|B) = [P(B|A)*P(A)] / P(B)
