Week 10 - Cognitive heuristics and models of decision making

Question 1

explain, with examples, the role of heuristics in common errors of judgment and decision-making

Answer 1

Heuristics - Mental shortcuts based on memory designed to speed up processing and decision making. But can make the wrong decision in some circumstances.

Tversky & Kahneman (1991) Dual processing theory -
System 1 = Fast thinking, unconscious processes, intuitive automatic.
System 2 = Slow thinking, conscious analytical, controlled aware processing.

Question 2

explain, with examples, prospect theory, loss aversion and the sunk cost effect—what are their implications for decision-making in everyday life?

Answer 2

Prospect Theory - Main assumptions - 1 - Individuals identify a reference point generally representing their current state - 2 - individuals are more sensitive to loss (loss aversion)

Loss aversion - greater sensitivity to potential losses than potential gains shown by most people engaged in decision making

Sunk-cost affect - investing additional resources to justify a previous commitment/investment, that has so far proved unsuccessful.