Lecture 13: Extra reading info

Chapter 8: Decision making: Cognitive psychology: Eysenck and Keane:

• What is subjective expected utility (SEU) theory:

• A normative decision-making theory stating that people choose the option with the highest expected utility, calculated by multiplying the utility (value) of each outcome by its probability and summing the results.

What is utility in decision making:

• Utility refers to how useful or valuable an outcome is for achieving a goal, which may differ from its actual monetary value.

What are the key principles of SEU theory:

1. Weak ordering – preferences exist between options.

2. Transitivity – if A > B and B > C, then A > C.

3. Independence axiom – shared features between options should not influence choice.

4. Sure-thing principle – if one option is preferred in all states, it should be chosen even when the state is unknown

What is diminishing marginal utility:

• The idea that each additional unit of wealth or reward produces less additional satisfaction than the previous one.

What evidence shows people violate rational decision theory:

• Allais paradox (preference for certainty)

• Intransitive preferences (Tversky)

• Disjunction effect (avoiding decisions under uncertainty)
  These show real decisions often deviate from SEU predictions.

Chapter 13: Judgement and decision making: Thinking and reasoning. Hove (2012):

• What is the difference between judgement and decision making?

• Judgement: estimating the probability of events using incomplete information.

• Decision-making: choosing between different options.

What is Bayesian inference:

• A method for updating beliefs by combining prior probabilities with new evidence to produce posterior probabilities

What is base-rate neglect:

• The tendency to ignore general statistical information (base rates) and rely instead on specific evidence when making judgments.

What are heuristics:

• Mental shortcuts or rules of thumb used to make judgments quickly, often reducing effort but sometimes causing biases.

What are two major heuristics identified by Kahneman and Tversky?

• Representativeness heuristic: judging probability based on similarity to a typical case.

• Availability heuristic: estimating frequency based on how easily examples come to mind.