Module 2 Study Guide Flashcards

Module 1 & 2 Overview

This module focuses on decision-making, heuristics, biases, forecasting, and nudging. You’ll learn how people make judgments, the errors they tend to make, and how psychological insights can improve decision-making.

🧠 Part 1: Decision-Making & Overconfidence (Module 1)

🔹 The Decision Process

• Four Phases of Decision-Making (Shoemaker, 2018)

1. Intelligence – Recognizing the need for a decision.

2. Design – Generating and evaluating alternatives.

3. Choice – Selecting an option.

4. Implementation – Executing the decision.

• Good decision outcomes come from good decision processes (not just luck).

• Example: A company evaluating whether to expand internationally would go through these four phases systematically.

🔹 Overconfidence

• Three Types of Overconfidence:

1. Misprecision – Thinking you’re more precise than you are.

2. Misestimation – Overestimating or underestimating outcomes.

3. Misplacement – Believing you’re better than others.

• More information often increases overconfidence, rather than improving accuracy.

• Example: A student believes they aced a test but later finds they misunderstood key concepts.

🧠 Part 2: Heuristics & Biases (Module 2)

🔹 Dual-System Thinking

• System 1 (Intuitive) – Fast, automatic, emotional.

• System 2 (Reflective) – Slow, deliberate, logical.

• Example: You instinctively think a luxury car must be better (System 1), but after research, you find a cheaper option with similar specs (System 2).

🔹 Major Heuristics & Biases

🧠 Part 3: Nudging & Better Decision-Making

🔹 Nudging

• Definition: Subtle interventions that steer people toward better decisions without restricting choices (Thaler & Sunstein, 2021).

• Example: Automatically enrolling employees in a 401(k) plan but allowing them to opt out.

• Types of Nudges:

1. Defaults – Making the best choice the automatic option.

2. Framing – Presenting information in a way that influences decisions.

3. Salience – Highlighting important details to attract attention.

• Example: Labeling unhealthy foods in red and healthy foods in green influences better eating choices.

🧠 Part 4: Forecasting & Learning from Experience

🔹 Why Are We Bad at Forecasting?

• Overconfidence Bias – We trust our predictions too much.

• Hindsight Bias – We believe past events were more predictable than they were.

• Affective Forecasting (Gilbert, 2006) – We overestimate how future events will impact our happiness.

• Example: People expect a job promotion to make them much happier, but over time, their happiness returns to baseline.

• How to Improve Forecasting:

1. Start from the outside view – Look at historical data.

2. Use probability estimates rather than gut feelings.

3. Learn from superforecasters – They continuously update their beliefs based on new evidence.

📌 Practice Questions

Multiple Choice

1. A person believes plane crashes happen frequently because they saw recent news reports about them. This is an example of:

A) Representativeness heuristic

B) Availability heuristic

C) Regression fallacy

D) Confirmation bias

2. A baseball player has an amazing rookie season but performs worse the next year. The best explanation is:

A) Overconfidence bias

B) Regression to the mean

C) The Affect Heuristic

D) Anchoring effect

3. People tend to donate more when they see a picture of a single starving child rather than statistics about millions suffering. This is called:

A) Hindsight bias

B) Base rate neglect

C) Identifiable victim effect

D) Attribute substitution

4. A company wants more employees to enroll in its 401(k) plan. The best nudge they could use is:

A) Framing retirement benefits in a positive light

B) Making enrollment automatic with an opt-out option

C) Offering financial incentives for enrollment

D) Providing employees with extensive financial education

5. A politician claims they knew all along that a law would fail, even though they originally supported it. This is an example of:

A) Overconfidence bias

B) Hindsight bias

C) The mere exposure effect

D) The availability heuristic

📝 Answers & Explanations

1. (B) Availability heuristic – The person judges probability based on how easily examples come to mind.

2. (B) Regression to the mean – Extreme performance naturally tends to move back toward the average.

3. (C) Identifiable victim effect – People respond emotionally to a single, known individual more than to large groups.

4. (B) Making enrollment automatic with an opt-out option – This default nudge increases participation.

5. (B) Hindsight bias – The person falsely believes they always knew the outcome.

🎯 Final Tips

✅ Use Active Recall – Quiz yourself using flashcards or practice questions.

✅ Apply Concepts to Real Life – Think of how heuristics & biases affect everyday decisions.

✅ Practice Questions – Revisit tricky concepts by answering questions without looking at notes.

✅ Teach a Friend – Explaining concepts aloud reinforces understanding.