Judgement and Decision Making

Reference point dependence

from which point the options are evaluated

Expected utility theory

probability p & value v EV=pxv

Axioms

• Dominance Principle (ranked best to worst)

• Cancellation (depends on outcome)

• Transitivity (A to B and B to C then → A to C

• Invariance (stable, no matter how decribed

Framing effect

different decision if information presented diferently (Asian Desease Problem)

Prospect Theory

value function
loss aversion (gain>loss)

gains-risk averse

losses- risk seeking

Normative decision analysis

prescribe how people are ought to make decisions in a rational way (expected utiity theory)

descriptive decision analysis

Describe how people actually make decisions (prospect theory)

Certainty effect

big impact if certain outcome switches to merely probable

Pseudocertainty effect

potential of certainty still better than none (overvalue protective measures)

Status quo

want to keep things the way they are, even if we didnt originally choose them, avoid potential losses of change

Mental accounting

construct mental accounts where expenditure is matched with consumption

to simplify financial decisions

(>< moneys fungibility)

Components

1. decison making - evaluate transactions& outcomes

2. budgeting- categorize into dif accounts

3. choice bracketing and dynamic - which evaluated together and when (disposition effect)

dispostition effect

predisposed to holding losers too long an selling winners too soon

Framing outcomes account types

• minimal account (2 options)

• topical account (comparing to reference point)

• comprehensive account (all factors, current, future, possible)

1 acquisition utility

=value - price paid

1 transaction utility

= price paid - internal reference price

🍺

beer on the beach

1sunk cost

current balance is negativ does not linger idenfinitely

1payment depreciation

prior expenditures become less relevant over time

1payment decouples

prepayment - decouples purchachse from consumption (seems to reduce perceived cost)

piece rating policy- link btw payment and consumption are very noticeable

2 budgeting

dividing into categories, facilitates rational trade-offs, self control within not fungible across accounts, small routine expenses not booked

2 gift giving

bigt budget is best when higher than what the person would get themselves

gift cards can change what people spend it on

2 income accounting

match seriousness of source of income to use of it

2 money categories

• current assets - money routinely spent

• current wealth - designated for saving, less tempting, range of liquidty

• home equity

• future income

3 Prior losses

do not stimulate risk seeking unless chance to break even

house money effect- prior gain can stimulate risk taking in same account

3 Narrow framing and short term loss aversion

excessive risk aversion

taki driver on rainy day with daily income targets

equity premium puzzle (stocks > government long term

3 diversification heuristics

different decision when making a lot decisions at the same time or one by one over time (which candy bar for the day)

System 1

Accessiblility, operates automatically & quickly

little effort

System 2

effortful activieties, choice, concentration, logically thinking

identify with this

Cognitive reflection task

test to show how often people use system 1 with 3 questions

inituitively wrong, corrected after some thinking

Confirmation Trap

searching for data that supports instead of disconfirming

Natural Assessment

competence based on facial appearance

Interplay System 1&2

1 quickly processes

2 monitors and endorse, correct or override

heuristics

simplifying strategies, in some cases backfire → biases

• representativeness

• availability

• anchoring

biases

systematic errors of judgement

Representativeness heuristic

tendency to judge an event as likely if it represents the typical features of its category → prototype

+ typical features often the most frequent ones

- does not account for : prior odds (insensitivity to base rates, conjuction fallacy), random process (regression to the mean, law of large numbers)

Base Rate Neglect (representativeness)

tendency to ignore/underweight statistical base rates in favor of specific diagnostic case info

Insensitivity to sample size (representativeness)

assume sample size doesnt matter

Misconception of chance (representativeness)

having a forth girl

Inattention to Mean Regression (representativeness)

mistake of expecting extreme past results to continue, while forgetting that naturally moves back toward the average over time

Conjunction Fallacy (representativeness)

judge conjunction of two events (A and B) more probable than one alone (A)

Availability heuristic

ease of recall

+ events that occur more often should be more accessible

- vividness (big events), recency, repetition (oft discussed)

model of Judgment Heuristics

• attribute substitution (unconsciously answers an easier, more accessible question in place of a complex)

• affect heurisics (emotional reactions 20 vs 200 no effect, only emotion)

Anchoring heuristics

• insufficient adjustment (develop estimates by starting with an initial anchor based on available info and adjust from there, bad if from irrelevant anchor)

• hindsight bias (obvious in hindsight that an unpredictable event would happen)

Overconfidence

subjective confidence > objective accurcy of those judgements

• optimistic biases (overestimate likelihood of experiencing positive events)

• overplacement (better than average)

• dunning kruger effect (unskilled and unaware of it)

• meta knowledge (how much we know about how much we know > actual)

money value

medium of exchange, unit comparison

more than nominal value tho

medium maximization

maximize medium than final outcome (loyalty card, work metrics, grades, miles)

Qualities of money

• pain of paying

• pain of holding (annoyance)

• dirty money

• denomination effect

denomination effect

more readily to give smaller denominations

>< tipping self consciousness, presence of others

ultimat egame

2 players, on decides how to split money the other accets (both get that amount) or rejects (non get anything)

compare relative, quality matters, harm when from human, less when from machine

Willingness to punish

3rd party in utlimate game paid 1 to reward even divider and punish uneven

Cost plus myth

respondents did not demand that firms lower prices input cost dropped
unless there was exploiting market power at expense of customer / workers

Superforecasting

(good judgement project) elite teams of forecasters
with a proven, consistently high level of accuracy at predicting future global and geopolitical events, typically using rigorous probabilistic thinking, open-mindedness, and frequent belief updating

Aggregation effectiveness

aggregating many opinions leads to the right one as myths &mistakes cancel each other out

Brier scores

measure accuracy of probability judgements

distance btw forecaster and what happend, lower is better

cognitive abilities & styles of a forecaster

above average fluid intelligence

cometitive, appetite for challenges, willingness to change mind, open mind thinking, embrace secular worldview like math & hypothesis

task specific skills for superforecasters

enriched environments for superforcasters

Motivated reasoning

more likely to believe things that want to believe but constraint by objective evidence & ability

seeing what we and to see, avoiding facts → motivated ignorance

• confirmation bias (seeking info that reinforces)

• disconfirmation bias (counterargue info that contradicts)

• prior attitude affect (previous info more convincing)

• recruiting evidence (can i belive this vs. must i /high threshold)

• evaluating (using higer/lower contruals)

Dishonesty

fail to judge oneself for unethical behavior, reinterpret benefits as own ability

desire to see themselves as moral, yet bend rules for personal gain

standard economicus dishonesty

trade off external benefits & cost of dishonest acts

linear line

Behavioral Economics dishonesty

linear line, with cutoff to straight line

not cheating to maximum

up to the point where they can still rationalize it

Justifications

moral self kept by making self serving justifications

pre violation (alturism/helping others, moral liscensing/past events) excusable

post violations (cleansing, partial confession, moral distancing) compensate

Wiggle room

exploiting ambuigity to stay moral

shifts graph upwards

Visceral inluences

wants and schoulds

visceral factors (hunger, thirst, sexual desire, moods, emotions, physical pain)

Akrasia

irrational state of mind in which we wittingly throw caution, reason, consequences away to succumbing temptation we know is bad (>< Enkrateia)

Motivational Myopia

focus on goal alleviating visceral state at suspense of other important goals

Restraint bias

tendency to overestimate their ability to control impulsive behavior

Temporal proximity

time, more likely to choose wants the sooner the choice will take effect

sensory proximity

directy / vividly perceived through physical senses

Hot & Cold empathy gaps

hot- short term preferences

cold- long term, no appreciation for behavior in hot states, failure to take measures to avoid future

interpersonal empathy gaps

cold- stigmatize impulsive behavior of others as they fail to appreciate the influences impulses

Visceral fit effect

stimulation fluency influence beliefs (availabiltiy) world associated with current visceral experience more likely

peak-end rule

judge an experience largely based on how they felt at its peak and its end (recency bias) while ignoring duration

AI as supplement

offloading, adds to our thinking, we check it

AI as supplant

surrender, replaces us

Moral AI aversion

dislike AI as moral advisor, has no mind and maximises outcomes

Sycophancy

AI flatters users, so seems more effective &return

Headwind Teilwind Asymmetry

notive headwinds immediately, tailwinds unnoticed after brief adaption

less gratitude, higher resentment, false belieft´ others have it easier (beyond self handicapping, genuine perception)

Associative Priming & Word Availability

Heightened mental accessibility of semantically related concepts within associative memory triggered involuntarily by antecedent stimuli. (e.g., exposure to disgust words sharply lowers recognition threshold for 'stink', 'smell', 'nausea')