Lecture 3/4 bounded rationality

system 1

automatic, unconscious, rapid

system 2

controlled, conscious, slow, rule based

substitution

answers easier questions than what is asked

base-rate neglect

little understanding of logic and statistics

heuristics

mental short cut, produce systematic and predictable biases

availability heuristic

judging probability or frequency by the ease with which instances come to mind

affect heuristic

judging something based on the emotional reaction it generates

positive emotion- high benefits/low risk

negative emotion- low benefits/ high risk

anchoring heuristic

when estimation of a value is influenced by an accidental or irrelevant starting point

prospect theory

descriptive theory of how decisions are made by humans under uncertainty

reference point, diminishing sensitivity, loss aversion

reference point

evaluations of outcomes made relative to a reference point. ex gain , loss

diminishing sensitivity

the effects of values are perceived to decrease as they become larger

loss aversion

a loss is psychologically more impactful than an equivalent gain

endowment effect

owners experience loss to a greater extent than buyers experience gain

status quo bias

we weigh disadvantages of proposed changes more heavily than advantages (and thus support status quo)

negotiation obstacles

each side of a negotiation feels 1 their concessions are losses and 2 others concessions are gains

decision conflict

when conflicted even among good options we keep searching sometimes picking worse option

decision paralysis

when there is choice proliferation, we are more likely to choose altogether