Week 9: Judgment & Decision Making

Question 1

What does normative mean?

Answer 1

it means “What is the ideal decision?”

Question 2

What doe descriptive mean?

Answer 2

“how do people make decisions?”

Question 3

What is a heuritsic?

Answer 3

A heuristic is a mental shortcut that allows people to solve problems and make judgments quickly and efficiently.

Question 4

What is Subjective expected utility (SEU) -

Savage, 1954

Answer 4

• A normative theory = How people should make decisions under uncertainty
• Decisions entail a ‘risk’ = So is the possible outcome worth the risk
• The goal of human action is to seek the optimal outcome = BEST OUTCOME
• Utility = The worth of something to someone. So what’s worth a lot to one person may not be worth so much to another person

Question 5

Can SEU predict decisions?

Answer 5

YES

Question 6

What is bounded rationality?

H.Simon, 1957

Answer 6

• Human-decision making is a process in which we attempt to satisfice, rather than optimise
• This means = We seek a decision that will be good enough, rather than the best possible decision
• There is a cost to considering all alternatives = The world is big complex place, we don’t have the capacity to understand everything AND we have limited times when making decisions
• People use heuristics

Question 7

What is prospect theory?

Kahneman & Tversky (1979)

Answer 7

• Descriptive model
• This model suggests we feel losses more than gains = We don’t like losing, it affects us more emotionally! – Sunk cost effect
• Most of us are loss averse = The emotional impact of a loss is stronger than the positive impact of an equivalent gain. So try to avoid a loss!

 2 Stage theory:

• Editing
• Evaluation

1. Editing = Outcomes are ordered using an heuristic
   • This stage is the framing effect : When our decisions are influenced by the way information is presented. Equivalent info can be more or less attractive depending on what features are highlighted

• Decisions are influenced by irrelevant aspects
• Same choice can result in either:

 Risk-aversion = If the decision is about possible gains : We tend to be risk averse (reluctant to take risks). So we go for options that provide lower expected returns but more certainty (wont be losing out on much).

 Risk-seeking = If the decision is about potential losses : We tend to be risk seeking. So we accept the lower expected value as long as we some potential to avoid losses

2. Evaluation = Using attitudes to risks & gains
   - We weigh up the attitudes to what risks and gains are involved in the decision

• This theory considers ‘reference point’ = Where you are in life

Question 8

What is representativeness?

Answer 8

• The more an object is similar to a class, the more likely we are to think it belongs to that class.
• E.g. : If a person looks like our stenotype of an accountant, then we are more likely to think they are an accountant
• So sometimes our decisions are based upon out stereotypes

Question 9

What is the gambler’s fallacy?

Answer 9

A mistaken belief about sequences of random events

ANOTHER EXMAPLE IS =After a run of losses there will be a good chance of a win

Question 10

What is conjuction fallacy?

Answer 10

We believe that two events happening in conjunction is more probable than one of those events happening alone.

Smaller % of something being in conjunction rather than by itself.
E.g. : Claire being a bank teller AND feminist is a slimmer chance then her being just a feminist OR just a bank teller

Question 11

What is availabilty?

Answer 11

Availability = How easily something comes to mind

• This is a very persuasive heuristic. Especially when the judgement involves any form of frequency estimate.

Question 12

What is anchoring?

Answer 12

Anchoring Effect = People have a tendency to rely TOO HEVAILY on the very first piece of info they learn.

• This has a serious impact on the decision they end up making

E.g. : if you first see a T-shirt that costs $1,200 – then see a second one that costs $100 – you’re prone to see the second shirt as cheap.
= So during decision making, anchoring occurs when people use an initial piece of information to make subsequent judgements

People rely heavily on the very first piece of info they learn = Anchor = Heavy

Question 13

What is the fast and frugal theory?

Gigerenzer & Goldstein (1996)

Answer 13

• The alternative to the Prospect Theory
• Decision making is = Simple, task-specific decision strategies
• Frugal = Use only one piece of information
• Fast = No need to integrate bits of information

Both Prospect and Fast & Frugal suggest the use of heuristics
– But disagree on their efficacy