10. DECISION MAKING AND REASONING

Judgment & Classical Decision Theory

• Classical decision theory assumes you're a perfect decision-maker:

  • You know all the options

  • You understand every outcome

  • You're fully rational

• This is called the Model of Economic Man and Woman — it's ideal, but not realistic.

• Subjective Expected Utility Theory:

  • We make decisions to maximize pleasure and avoid pain.

  • We estimate how good (utility) and how likely (probability) an outcome is based on our own judgment.

Heuristics (Mental Shortcuts) & Biases

• Because we can’t analyze everything, we use mental shortcuts called heuristics.

• Heuristics:

  • Satisficing: Stop searching once a "good enough" option is found.

  • Representativeness Heuristic: Judging based on similarity to a stereotype.

  • Availability Heuristic: Judging based on how easily we remember examples.

  • Anchoring: Being influenced by initial information (anchor).

  • Framing: Decision influenced by how options are presented.

Bias

• Illusory Correlation: Seeing relationships that don't exist.

• Overconfidence: Overestimating our abilities or knowledge.

• Hindsight Bias: Believing we "knew it all along" after seeing the outcome.

Fallacies

• Gambler’s Fallacy: Thinking past losses make future wins more likely.

• Hot Hand Fallacy: Thinking a winning streak will continue.

• Conjunction Fallacy: Believing a combination of events is more likely than a single one.

• Sunk-Cost Fallacy: Continuing a bad investment because of past investments.

Group Decision Making

• Benefits:

  • More ideas and memory resources

  • Combining expertise of members

• Risks: Groupthink

  • Occurs when a group avoids conflict and seeks consensus too quickly.

  • Symptoms:

  • Closed-mindedness

  • Rationalization (distorting facts)

  • Squelching dissent

  • Mindguards (protecting the group from outside opinions)

  • Feeling invulnerable (overconfidence in being right)

  • Feeling unanimous (assuming everyone agrees)

  • Antidotes: Encourage criticism, use impartial leadership, invite outside input.

Reasoning

• Deductive Reasoning (General to Specific) (topdown)

  • Conditional Reasoning:

  • If p, then q

  • p → therefore q (Modus ponens)

  • not q → therefore not p (Modus tollens)

  • Syllogisms:

  • All psychologists are pianists.

  • All pianists are athletes.

  • Therefore, all psychologists are athletes.

  • Note: Valid logic doesn't always mean the conclusion is true in real life.

• Inductive Reasoning (Specific to General) (bottomup)

  • Based on observations and examples, we generalize.

  • Example: If all math students you've met are smart, you might assume all math students are smart (but this isn't certain).

  • Types:

  • Causal inferences: Judging cause and effect.

  • Categorical inferences: Group-based conclusions.

  • Analogical reasoning: Drawing parallels from one case to another.

  • Why Use Inductive Reasoning?

  • Helps deal with uncertainty

  • Allows us to predict events