INDUCTIVE REASONING: (WK6):

NORMATIVE THEORIES:

• which would you prefer? £5 or £5.37

• focus on how people should make decisions while de-emphasising how they actually made them

• assumes people ‘calculate’ the utility (subjective perceived value) of all options and select the one that maximises utility

PROSPECT THEORY:

• distinguishes between risk-free and risky decision making

• potential gain/loss vs risk-free

LOSS AVERSION:

• people are much more sensitive to potential losses than potential gains

  • gains = risk averse

  • loss = risk seeking

FRAMING EFFECT:

• decisions are influenced by irrelevant aspects of the situation

  • e.g. background info and wording of the question

SUNK COST EFFECT:

• additional resources are expended to justify some previous commitment

SOME HEURISTICS:

ANCHORING AND ADJUSTING:

• when we estimate we begin with a first approximation (anchor) and make adjustments on that number on the basis of additional info

• however adjustment is often too small

IGNORING BASE RATES:

• when you ignore the actual rates/amount, instead favouring the rates that you have information for

AVAILABILITY:

• judging/evaluating events based on how easy it is to think of relevant examples from memory