wk2 - decision making

what is expected utility theory?

the decisions we make are based on maximising our expected utility; which is the analysis of all possible acts, consequences and states—think at how these components bring us closer to our goal

what does it mean by a utility analysis in expected utility theory?

evaluative process within decision making; that looks at acts, consequences and state

can you outline what acts, consequences and state are?

• acts — different actions that a decision maker can take

• consequences — possible results of an act (pleasant, unpleasant, neutral)

• state — factors outside the decision maker's control that affect outcomes; state may determine which consequence follows an act

expected utility theory is outlined by a utility [value] and why is it so important to decision making?

it is the reflection of how well a consequence helps to achieve an individual’s goals; this is a subjective interpretation of the value—on the basis of analysis, a utility value helps us decide whether or not a consequence will help us reach our end goal

what is a positive utility?

moves us closer to achieving goals

what is a negative utility?

moves us further away from achieving the goal

define decision making

a set of cognitive processes where individuals choose an action from multiple possible alternatives

what is preference-based decision making?

some decisions are made on the basis of our subjective choices over the consequence of different possible actions

what is perceptual decision making?

decisions can involve choosing between competing interpretations of noisy or ambiguous sensory info

preference-based decision making is said to relate back to expected utility theory, how?

preference-based decision making is fundamental in shaping how expected utility theory applies to real-world decisions—preferences influence both the immediate choices individuals make and the way they evaluate potential consequences arising from those choices

why is rationality a component of decision making?

rationality is defined as making decisions that maximise expected utility

what is prospect theory?

explains how people make decisions under conditions of risk—instead of evaluating final outcomes in absolute terms, people evaluate gains and losses relative to a reference point

in relation to prospect theory, what is meant by reference point?

the amount or significance of an object/situation

what is risk aversion?

is choosing for relatively certain outcomes over relatively uncertain outcomes—whereby individuals will avoid a choice that lacks security and prefer a guaranteed outcome; to minimise losses or unwanted results

how can risk aversion be explained by prospect theory?

through the gain domain—as people gain more, each additional unit is valued less (diminishing sensitivity), making a sure gain more attractive than a risky one with the same expected value; this is why individuals often choose certainty over probability when facing potential gains

what is decreasing marginal utility?

where an increase in an object or situation may become unideal or redundant to the individual, object losing value; I love mangoes but if I got one every single day it would pile up uneaten and most likely would need to throw them out—too much of anything is inconvenient

what is loss aversion?

a tendency to prefer avoiding losses more strongly than acquiring similar sized gains—losses weigh heavier on decision-making than equivalent gains, shaping choices towards safer actions;

why is losing something so explicitly harsher in loss aversion?

the negative utility from losing something is stronger than the positive utility of gaining something

how can loss aversion be explained by prospect theory?

refers to the asymmetry in the value function; people make decisions not on absolute outcomes, but on how options deviate from what they consider their current state or reference point—losses are felt more intensely than equivalent gains as it is steeper for losses than for gains

what is decreasing marginal disutility?

where the decrease of an object or situation becomes inconvenient to the individual; having 6 guests and breaking 1 of 6 glasses, every loss leads to a person/people not having a cup to drink from—too little of something is an inconvenience

what is the endowment effect?

the tendency to overvalue owned possessions and undervalue those not owned—resellers on depop overpricing a damn shirt

how can the endowment effect be explained by prospect theory?

by highlighting how ownership shifts a person’s reference point—once an item is possessed, giving it up is perceived as a loss rather than a neutral trade and due to loss aversion, that loss is valued more strongly than the equivalent gain from selling it; leads to people demanding more money to give up an item than they would pay to acquire it

what is the framing effect?

people make different decisions in the exact same situation depending on whether the scenario emphasises potential gains or potential losses—decisions can significantly change based on how situations are framed; think about the importance of language

how can the framing effect be explained by prospect theory?

concept of reference dependence and loss aversion influence decisions—when identical options are presented as gains, people tend to be risk averse; when framed as losses, they become risk seeking; because the frame alters the perceived reference point, changing how outcomes are evaluated on the Prospect Theory value curve

what is default option bias?

individuals often prefer the default options over the other options—even when the default is not a good option; can explain why people are more likely to choose an action when they must opt out of it when they must opt in to it

how can default option bias be explained by prospect theory?

it often relates to risk aversion; individuals often prefer the certainty of a default option over the uncertainty of selecting an alternative

how does the ultimatum game show the relationship between emotional decision making and interpersonal decision making?

involves two players: a giver with a certain amount of money and a receiver; giver decides how much money to offer from a fixed amount (e.g., $100 or $10)—emotions can shift priorities from maximizing gains to rectifying perceived injustices; our ability to offer fairer or unfair amounts are influenced by interactions via humans

what is an affect heuristic?

the tendency to make decisions based of their emotional reactions to different potential consequences; gut feeling

how does an affect heuristic impact our decision making?

reliance on somatic markers in our body are portrayed to have some form of a message—dependent on the individual; therefore individuals might take these marks to heart in making choices

with regard to risky decision making, how does this relate back to our emotions?

• a risky decision involves taking an action that has unpredictable consequences—does an individual’s emotional state change their willingness to make decisions that have unpredictable consequences?

  • seen in the DSM-5 for manic episodes [and or bipolar disorder] in risk taking behaviours

• affect infusion model: proposes that emotional information is incorporated into the appraisal of actions and consequences

  • infusion if affect congruent—positive emotions enhance risk-seeking behaviors, while negative emotions increase risk aversion.

• mood maintenance hypothesis: people in pleasant moods want to maintain their mood, and that people in unpleasant moods want to improve their mood

  • predicts that positive emotions increase risk aversion and negative emotions increase risk seeking

    • content with what I have vs. I am not content

• studies provide mixed support for both theories, showing emotions can lead to riskier choices or cautious decisions based on the context and emotional state.

  • context is always important [in psychology, especially]