Decision Making

Expected Utility Theory

We make decisions based on the expected utility of the outcomes & their respective probabilities

Utility

Whatever end a person may want to achieve

System 1 Thinking

Heuristic Mode, Fast, Efficient, Based on Previous Experiences & Beliefs, Intuition

System 2 Thinking

Analytic Mode, Slow, Deliberate, Controlled, More Cognitively Demanding

Normative Model

Describes how we ought to think in a given situation

Descriptive Approach

Describes how we actually think; we show bounded rationality

Availability Heuristic

Events that are more easily remembered are judged as more probable

Illusionary Correlation

Strong correlation between two events appears to exist but doesn't

Representativeness Heuristic

Probability that A is a member of class B is determined by how well properties of A resemble properties usually associated with B

Base Rate

Relative proportions of classes in the population

Conjunction Rule

Probability of conjunction of two events cannot be higher than the probability of single constituents

Law of Large Numbers

The larger the number of individuals drawn from a population, the more representative the group will be of the entire population

Myside Bias

The tendency for people to generate & evaluate evidence& test their hypothesis in a way that is biased towards their own opinions and attitudes

Confirmation Bias

Selectively looking for information that conforms to a hypothesis & overlooking information that argues against it

Backfire Effect

People's support for a particular viewpoint becomes stronger when presented with facts opposing their viewpoint

Framing Effect

Decisions are influenced by how the choices are stated

Losses

They are more worth avoiding because they are stronger

Prospect Theory

Assessing the way people evaluate information in a descriptive approach instead of a normative approach

Prospect Theory Curve