Lesson 11 - Decision Making

Automatic vs reflective systems

Automatic systems

• Uncontrolled fast, unconscious

Reflective systems

• Controlled, slow, conscious

How do we making voting decisions

• Those who looked more competent won the voting decision/ was the most picked

Bounded rationality/ thinker —> bounded decision making

• Uses heuristics to make decisions b/c they have limited info, cognitive limitations and time constraints

• Use heuristics and tend to make systematic errors and mistakes in your judgments and decision making

  • Heuristic = quick thinking

  • We use heuristic bc its quick and useful for us

• Bounded thinker is limited by:

1. Limited info

2. Cognitive limitations (Brain cant process a lot of info)

3. Time constraints

Anchoring and adjustment: 1991 study of 10 corporations being ranked by Fortune to be among the 500 largest US-based firms according to sales volume

• Group A: Apple, Levi Strauss, Maytag etc..

• Group B:Conagra, United Technologies etc…

• Participants were asked which Group had the largest total sales volume

Results

• Most participants chose Group A, which is wrong —> They chose Group A because the names felt most familiar so your brain assumes this Group has the largest total sales volume

• Group B actually had the most total sales volume

• People rely on familiarity instead of actual data, leading them to overestimate well-known companies and make incorrect judgments.

1. Anchoring and adjustment

• Anchors are starting points based on some piece of available info

• Once the anchor is set, the outcome is biased around it

2. Availability heuristic

• People judge how likely something is based on how easily examples come to mind. Influenced by 2 factors:

  • Accessibility: How easily you can recall something

  • Salience: How vivid or noticeable it is

  • E.g Example: You might trust a friend’s story more than objective data (like consumer reports) because it’s easier to remember.

3. Representativeness

• How representative/ similar A is to their stereotype of B

• Based on similarity

• People respond based on their stereotypes

4. Subjective value function

Objective vs subjective value function

• Objective value: When something is objectively or actually worth

  • e.g $100 is actually worth $100

• Subjective value: what it is worth to you —> how much value you place on something regardless of the objective value

  • e.g you think $100 is alot but Bill Gates probably think $100 is little

• The subjective value function states that as we get more of something, we value subsequent increments of that thing less and less —> the more you already have of something, the less extra happiness or value you get from getting a little more of it.

• The subjective value function shows diminishing sensitivity: identical differences are perceived as larger when values are low (e.g., 3% vs 5%) than when values are high (e.g., 95% vs 97%), leading to different judgments despite equal objective differences.

  • A change from 3% bad to 5% bad feels like a big jump in badness.

  • But a change from 95% good to 97% good does not feel like a big jump in goodness. Even though mathematically both differences are 2%.

Example:

• If you have $10, getting $20 more feels like a big gain.

• If you already have $1010, getting $20 more usually does not feel nearly as important.

So even though the objective increase is the same: $20 is actually $20

• 10 → 30 = +20

• 1010 → 1030 = +20

the subjective value is bigger in the first case.

5. Framing

• Framing is when the way information is worded as a gain or a loss affects how people judge it and what they choose —> Framing means people react differently depending on whether the same outcome is described as a gain or a loss.

GAIN FRAME

• Plan A: This plan will save 1 of the 3 plants and 2000 jobs

• Plan B: This plan has a 1/3 probability od saving all 3 plants and all 6,000 jobs

LOSS FRAME

• Plan C: This plan will result in the loss of 2 of the 3 plants and 4,000 jobs

• Plan D:This plan has a 2/3 probability of resulting in the loss of ALL 3 plants and all 6,000 jobs

Summary of the graph:

• When the situation is framed as a GAIN (plants saved):

  • Most people (72%) choose the safe option (Plan A)

  • Only 28% choose the risky option (Plan B)

• People avoid risk when thinking about gains

• When the situation is framed as a LOSS (plants lost):

  • Only 22% choose the safe option (Plan C)

  • Most people (78%) choose the risky option (Plan D_

  • People seek risk when its framed as a loss

  • “ I aleady know I’m losing something, so I might as well take a chance and try to avoid that loss.”

Overall:

• Gain frame → people prefer the safe option

• Loss frame → people prefer the risky option

Prospect Theory

• Losses feel worse than gains feel good

• “A loss of x hurts twice as much as a gain of x pleases”

  • The pain of losing $100 is stronger than the happiness of gaining $100

The judge–advisor paradigm

• How much do people rely on advice vs. stick to their own judgment?

• studies how individuals adjust their initial decisions after receiving advice, by measuring how much their final judgment shifts toward the advisor’s recommendation.

Results:

• People change their answers toward advice, but usually less than they should —> only change their answers a little bit bc they still trust themselves more

Egocentric advice discounting

• People trust themselves more than others’ advice —> People tend to underweight
  advice from others and over-weight their own opinions. Likely to be particularly true when decision makers perceive their own opinions to be superior to those of other people

• People will trust their decisions more when:

  • 1. Person feels optimistic they will make a good decision

  • 2. Person feels that they have the decision under control

  • 3. Person feels confident about their ability

  • 4. Amount of power

    • Feeling powerful makes people trust themselves more and rely less on advice

    • High power → LOW use of advice

    • Low power → HIGH use of advice

Narcissism

• A personality trait where people have an inflated, overly positive view of themselves

• Think they are better than others

• Believe they are special or unique

• Have overconfidence in their abilities

• Feel entitled (deserve more than others)

• Key point: Narcissistic people are less likely to take advice because they trust themselves more

• High narcissism → LOW use of advice

• Low narcissism → More cooperative / dont think highly of themselves —> HIGH use of advice