10/27 Lecture #14: How We Decide

What is an mathematical equation we can use to make rational decisions?

Why do people often fail to make these rational decisions?

Expected Value: odds of gain x value of gain

People often fail to make these rational decisions because we use heuristics, cognitive shortcuts, to make decisions.

What is sample size neglect?

failure to consider how sample size affects the variability of results

Smaller samples are more likely to produce extreme results.

What is the law of small numbers?

a smaller number of observations will result in a greater chance of extreme/unusual results

What is base rate neglect? What can cause it?

Ignoring the overall frequency of an event or category when judging its probability

It can be caused by availability bias

What is the representativeness heuristic?

Judging probability based on how closely something resembles a typical example of a category, rather than considering actual base rates

What is the availability heuristic? What kind of bias can this result in?

Judging how likely something is based on how easily examples come to mind

Availability heuristic causes availability bias, which is the tendency to overestimate the likelihood or frequency of events that are easy to recall, often because they are vivid or memorable.

What is the conjunction fallacy? What heuristic is this caused by?

Mistakenly believing that two events occurring together are more likely than either event occurring alone, even though the probability of two events occurring together cannot be greater than the probability of either individual event.

This can be caused by representativeness heuristic.

What is the planning fallacy? What heuristic is this caused by?

The tendency to underestimate the time, costs, and risks needed to complete future tasks while overestimating their benefits

This can be caused by the availability heuristic. People easily imagine completing the task but may overlook unexpected distractions.

What is the endowment effect?

The tendency to value something more highly once we own it, often demanding more to sell an item than we would pay to buy it.

Do gains or losses have greater psychological impact?

Losses tend to have a greater psychological impact than equivalent gains.

Are increases/decreases in losses/gains linearly related to psychological impact? Explain.

Each additional unit of gain or loss tends to have a smaller psychological impact as the total amount increases.

What is temporal discounting?

How can temporal discounting change depending on when rewards are received?

The tendency to value immediate rewards more highly than future rewards, even when the future reward is larger

People may prefer a smaller reward now over a larger reward soon, but prefer the larger reward when both options are delayed.

What is a nudge?

A subtle change in how choices are presented that influences people's behavior without removing their freedom to choose.