7a - rational and irrational decision making

what methods can be used to study decision making?

• experimental behavioural studies

• normative decision theory (maths)

• animal behavioural studies

• naturalistic observation

how do you work out expected value

multiply probability x value of an outcome for expected value

what is risk aversion

whilst expected value would indicate that most people would choose a riskier option (that would result in higher value), most people choose certainty and a lower risk option

what is utility

how good something makes you ‘feel’ → if you already have a certain amount, and you get more, there is a diminishing sensitivity to gains (more increase in utility if you start at 0)

• explains risk aversion

how do losses violate expected utility

people are risk averse for gains, but risk seeking for losses

• this is true for non-monetary things too - e.g. 1/3 probability 600 people will be saves, 1/3 probability nobody will die - 200 people will be saved vs 400 people will die

what is the availability heuristic

 how often/easy to imagine something happening, but can lead to misjudgements e.g. shark attack in Australia  (media environment = things that rarely happen are projected online so easier to bring to mind - e.g. plane crash probability is very very unlikely BUT can imagine it easily)

what evidence is there for the availability heuristic (Lichtenstein et al.)

people overestimate rare events (e.g. death by firework), and underestimate common events e.g. heart attack

how did Tversky and Kahneman evidene the availability heuristic

list of 39 names including 19 famous men vs 20 less famous women (or other way around)

• 81% judged that gender with famous names was more frequent (less frequent but easier to recall)

what is conjunction fallacy

conjunction fallacy is a cognitive bias in which individuals assume that a more detailed scenario with multiple conditions is more probable than a simpler, single condition scenario, even though probability theory dictates the opposite

what is the representativeness heuristic

judgements of probability are based on assessments of similarity → usually sensible, but can lead to misjudgement.

• e.g. neglecting the base rate of how many people occupy a particular career

Anchoring heuristic

if provided with a number, people’s answers will be influenced by the number regardless if they know it has nothing to do with the answer

e.g. more or less than 65% → will answer ~45%, more or less than 10%, will answer ~25%

• this happened even if random baseline was spun on a wheel to prove it had nothing to do with the question

what is the Gambler’s fallacy

misperceptions of randomness → e.g. roulette table producing 26 black spins is just as ‘random’ as any other configuration

• e.g. apple had to change their algorhythm to make it not random so it appeared random

how do ‘even money’ streaks change after time

after streaks of black, people will bet against the streak even though likihood doesnt change

why was the number 53 relevant in italy

didnt come up for 2 years in the lottery so people out loads of money on it

what is prospect theory

explains how people make decisions under risk, emphasizing that losses weigh more heavily than equivalent gains and that choices are influenced by reference points and framing.

what is value function

outcomes considered as gains or losses with respect to a reference point (often the status quo → your current level of wealth)

• if you have less, there is diminishing sensitivity to losses

• if you have more, you have diminishing sensitivity to gains

outline risk attitudes

risk averse for percieved gains, risk seeking for percieved losses

what is endowment effect

The endowment effect occurs when ownership increases the perceived value of an item.

People are generally more reluctant to give up something they own than to acquire the same item if they do not own it.

This effect is closely linked to loss aversion, a principle from prospect theory, which suggests that the pain of losing an owned object outweighs the pleasure of gaining an equivalent object

what is the certainty effect?

• changes in probability will have a much bigger impact when they approach certainty (0% or 100%)

• most people would chose to improve chance of winning from 90%-95% than 65-70%

what is the attractrion effect

The attraction effect is a cognitive bias where people tend to have a preference for a certain option when it is presented alongside a similar but less attractive alternative. This bias occurs because the presence of the less attractive alternative makes the preferred option appear even more attractive in comparison.

• this is true even in slime mould with no nervous system (e.g. food source in bright light/no light, you can bias where it goes with a decoy option)

• true also in ants

how does attraction effect change from individual-colony of ants

attraction effect is less relevant when the whole colony is picking - they get no comparison as not all ants see all options