P&C2 b4l4

Reasoning & Decision-making - Decision-making

What is a decision?

Choosing a specific option out of multiple options, which emphasises consequences.

How do judgements differ from decisions?

Judgement proceeds decisions and emphasise accuracy

What are normative theories?

• Concerned with how people SHOULD make decisions

• Uses the assumption that people act rationally

What are descriptive theories?

Concerned with how people ACTUALLY make decisions

What is utility theory?

We assume people act to maximise expected utility of the final outcome.

We calculate the expected utility of each possible outcome in a decision, compare them and then choose the option with the greatest expected utility.

Is utility theory normative or descriptive?

Descriptive

What is expected utility?

p (given outcome) x utility of outcome

What is utility?

The subjective value we attach to a given outcome

What is value function in utility theory?

Value function (also utility function) describes the relationship between utility (subjective value = how good/bad outcomes are) and objective gains/losses.

What is prospect theory?

Prospect theory is a behavioral economic theory that describes how people make decisions involving risk, highlighting that they evaluate potential losses and gains differently.

What are the 3 main assumptions of prospect theory?

1.     Individuals identify a ‘reference point’ representing the current state

• Cares more about how much of a difference the outcome is from the starting point -> gain or loss

2.     Individuals are more sensitive to potential loss than gains (loss aversion)

• More likely to try to avoid losses

3.     Individuals overweight rare events

• More sensitive to rare outcomes

What is value function in prospect theory?

Value function (or utility function) describes how sensitive individuals are to gains/losses

-        To many, the subjective value of losing £100 is greater than the subjective value of a £200 gain

What is the framing effect?

Decisions are influenced by how the situation is framed

What is the sunk-cost effect?

Tendency for people to pursue a course of action even after it has proved to be suboptimal, because resources have been invested in that course.

What does it mean to overweight rare events?

Think rare events are more likely than they are

• Explains national lottery -> low winning chances, but people still buy tickets

• In lab, participants often overweight described probability of rare events

What is loss neutrality in prospect theory?

Choose between:

-        50% £1, 50% -£1

-        50% £5, 50% -£5

 

Prospect theory predicts loss aversion, therefore people should pick option 1

-        Actually a 50/50 split between choosing option 1 and 2, neutral to loss in this situation.

 

Breaks down when using extreme amounts.

Compare utility & prospect theory on detail, value function and predictions.

• Prospect theory is more detailed than utility theory

• Both assume value function (aka utility function) – non-linear mapping between objective and subjective value

• Prospect theory predicts a wider range of phenomena – loss aversion, overweighting

What are some criticisms of utility and prospect theory?

-        It doesn’t explain why we’re loss averse

-        Many predicted phenomena can disappear/be reversed in specific studies

-        Doesn’t account for individual differences on its own

How can self-esteem and narcissism lead to individual differences in utility and prospect theory?

High self-esteem = prefer risky gambles

High narcissism = high sensitivity to reward, low sensitivity to loss

Explain the typical decision using utility theory.

Explain this decision using prospect theory:

In a coin toss -> gain £200 for heads, loose £100 for tails

-        Many would refuse this coin toss

-        Loss aversion overpowers potential gain

Explain this example of the framing effect, when using a gain-framed condition.

-        Many people feel securing 200 peoples lives is better than potentially saving 600, but risking loosing more

How do people evaluate gain- and loss-framed conditions using these examples?

• Programme D and B are equivalent

• But programme D is presented as loss aversion and therefore is more appealing

• By framing losses -> the small chance of saving everyone’s lives becomes more likely to the participant

What is a criticism made by Mandel & Vartanian about the framing effect in these questions?

-        The ambiguity in option A -> could be interpreted as at least 200 people are saved, not only 200 people

-        When programmes are completely described (only 200), the framing effect disappeared

-        Is this similar to judgements? (heuristics)

What led to the framing effect disappearing in Almashat’s study on medical scenarios?

• Medical scenarios involving cancer treatments

• When participants explicitly listed advantages/disadvantages of each option and justified their decision – the framing effect disappeared

• Engaging in deliberate weighting of options reduces/eliminates the effect (system 2 kicks in?

How did Dawes provide evidence to support the sunk-cost effect using this test:

-        £100 deposit for a hotel room

-        On route to a hotel, you become ill

-        You think you’ll probably have a better time at home -> do you turn back?

-        Many people decide to keep going -> sunk-cost

-        Loss aversion -> depending on where is set as the starting pt

How did Baliga & Ely provide criticism of the sunk-cost effect using business students and investments?

-        Give MBA business students full information about investments

-        Showed opposite of sunk-cost -> more likely to switch

-        Certain groups don’t show the effect, so not universal

What did Hertwig find about overweighting a real-world rare event when decisions are based on descriptions or experience?

-        When decisions are based on descriptions -> overweighted

-        When decisions are based on experience -> underweighted

-        Due to low sampling = may never have experienced a rare event

Availability heuristic?

What are the emotional and social factors related to decision making?

Anticipated/actual loss may lead to negative emotions (e.g. anxiety), which may explain loss aversion.

What is omission bias?

Preference for inaction when presented with risk

What is status-quo bias?

A tendency to prefer the current state of affairs and resist change, even when better options are available. Preferring to accept status-quo than change decisions.

What is impact bias?

An overestimation of intensity/duration of negative emotions to loss (somatic marker hypothesis)

How did Kermer provide evidence for impact bias?

-        $3 loss predicted to have greater impact on happiness than $5 gain

-        No difference in actual experience, only anticipation differs

What did Giorgetta find about how agency effected emotional response to loss?

-        Loss felt as regret if decisions were made by participants

-        Loss felt as disappointment if the decision was made by computers

What did Brown find about parents making vaccine choices and omission bias?

Brown found that parents who made vaccine choices exhibited omission bias, preferring to avoid vaccination due to fears of potential negative outcomes rather than considering the risks of non-vaccination. This bias often led to an increased likelihood of choosing not to vaccinate their children.

What did Wroe find about anticipation of parents around child vaccinations?

Higher anticipated responsibility and regret if child experienced adverse reaction due to vaccination

What did Aberegg find about pulmonologists treating lung disease and omission bias?

Less likely to choose the best management strategy when given the option to do nothing (40%) vs when not give the option (59%)

How did Samuelson & Zeckhauser provide evidence for status-quo bias in retired people?

They found that retired individuals often preferred to maintain their current investment choices rather than reallocating their assets, indicating a tendency to favor the status quo over potential improvements, despite no financial cost in changing.

However, there may be a cost in terms of the effort in changing.

What did Simonson & Straw find about accountability and the sunk-cost effect?

Increased accountability leads to a heightened sunk-cost effect, where individuals feel a greater necessity to justify their initial decisions. This results in a longer commitment to those decisions, even when they may not be optimal.

What are the steps individuals would use to go through complex decision making, according to normative models?

1.     Identify attributes relevant to the decision

2.     Decide how to weight attributes

3.     List all options under consideration

4.     Rate each option on each attribute

5. Obtain total utility -> select option with highest utility

What is elimination-by-aspects theory?

A decision-making process involving the serial elimination of options based on specific criteria until only one option remains. Individuals assess one aspect at a time, removing options that do not meet that criterion, and then move on to the next aspect, with the order of evaluation potentially influencing the final choice.

What is a criticism of elimination-by-aspects theory?

Can’t handle trade-offs (e.g. distance vs cost) -> need to think about one before the other

How did Kaplan suggest elimination-by-aspects theory would occur in 2 stages?

1.     Elimination (as per elimination-by-aspects theory)

2. Detailed comparison of small number of remaining (as per utility theory

How is Kaplan’s elimination-by-aspects theory useful?

-        Useful for filtering when many options are available

-        Still entails detailed comparison to make optimal decisions from a small subset

How did Galotti propose US uni students chose their majors in 5 steps?

1.     Constrained info -> focused on 2-5 options at one time

2.     Options considered decreased over time

3.     Constrained info -> focused on 3-9 attributes at one time

4.     Attributes considered remained constant over time

5.     Higher ability/more education -> more attributes considered at one time

What is memory guided decision-making?

using past experience to make rapid, pressured decisions

What is Klein’s recognition-primed decision model?

-        When we need to make rapid decisions, experts retrieve previously similar situations and evaluate whether the previous decision was appropriate -> do not need to generate a new decision

-        Experts also typically characterise novel situations as examples of familiar situations

What group is most likely to use elimintion-by-aspects?

more typical for non-experts making considered decisions

What did Simon suggest decision making is bounded by?

Bounded rationality:

o   Environmental constraints (E.g. additional info costs)

o   Cognitive constraints (e.g. STM capacity)

We are rationale as permitted within these constraints

What is satisfying?

Choosing the first option that satisfies an individuals minimum requirements, serially considering the options.