CHAPTER 14 NOTES Hardest things about decision making is to define it, it is so pervasive that we could equate it with virtually

y all voluntary human behavior Equating decision making with selecting among explicit choices may be too narrow Good decision making involves generating new options Decision making can be roughly defined as generating, evaluating, and selecting among a set of relevant choices To make effective decisions we often must assess risks To cope with complexities, people seem to adopt strategies or heuristics that are efficient and effective Decision making has its costs, and they must be given important consideration in theories of human choice behavior Research on choice behavior shows human decision making often shows clear departures from optimality To get an idea of how visual system works, researchers focus on situations in which strategies and heuristics may fail or be misleading Human shortcomings in decision making can be quite serious, decision making can thus be improved so we should understand it better Simon suggested that decision making might show bounded rationality - instead of making perfect decisions all time, people make good decisions most time Rational and Normative Models Rational model - Easiest to define rational by considering what is irrational. We define irrational by the law of contradiction = Reasoning process based on the same evidence that reach contradictory conclusions are irrational o Person who prefers A to B and B to C should prefer A to C o Choices show transitivity = Rationality is not based on what most people value Models that provide an ideal standard or norm hold people to a stricter criterion Normative models describe what choice should be made = Normative models are prescriptive and they set standards by which human decision making can be evaluated Peoples choices often violate this model because they are simple rationality assumptions Expected Value Theory An early normative model in economics was expected value theory = Assumes that people calculate the monetary value of a set of choices, and then select the option with the highest value o EVT can be calculated by multiplying the probability of each outcome by the value of that outcome, adding together these values o As it turns out peoples behavior often violates expected value o Fails to take into the account of Utility of different choices to different people Expected Utility Theory Personal value of an outcome is different from its objective monetary value, economic theories moved from expected value to expected utility o Similar to expected value theory except that it explicitly acknowledges that the value of an outcome will depend on goals of a particular individual o In this case, evaluating an option requires determining the utility of each possible outcome , and the multiply this by the probability that will occur Theory is quite testable , mainly because it implies that people will be consistent across a set of choices People show a tendency to prefer certain sure gains and to avoid certain losses o This tendency to overweight certain gains is known as the certainty effect Limitations of Expected Utility and Alternatives To It

CHAPTER 14 NOTES

Variations of utility are important because they provide useful info about what factors guide human decision making Violations of Expected Utility o Certainty effect represents one form of violation of expected utility o The certainty effect shows that outcomes perceived with certainty loom larger and are overweighed relative to uncertain outcomes o Expected utility has no way of capturing this overweighting Preference Prevails o Many theories require that different measures of preferences yield consistent outcomes o Exceptions to this rule of principle are known as preference reversals - I.e.. Choosing A more than B because you value A more o If a person chooses A over B it must be because expected utility is higher o Despite considerable efforts and much to their surprise, they also observed preference reversals These are even seen for seemingly equivalent choice measures In example of vacations , 1/2 were told which vacation they would prefer and other 1/2 were asked to cancel less desirable option Findings show that spot B was preferred but was as likely to be rejected as Spot A People like to have reasons to justify their decisions Spot A is bland where Spot B is descriptive and has clear negative aspects as well Compatibility or match between the form of questions affects selective attention to choice of components o When options are evaluated individually some attributes may be difficult to evaluate and so people may not use them in an evaluation o When two or more options are compared people need to attend only to the relevant goodness of values and so it can be easier to evaluate all attributes Context Effects o EUM - assumes each option is evaluated individually without regard to the other options in the set o Peoples evaluations of one option is influenced by the presence of other options in the set = Context Effect Because context is effecting how each option is evaluated o Good Context Effect - Attraction Effect - Occurs in situations that show to dimensions that might describe a set of options The presence of a dominated option in a choice set tends to Attract choices to the option that dominates it Context effects are problem for EUT - preference between A and B should depend in intrinsic properties not which is inferior alternative Framing o Show the same info presented in different forms can lead to different decisions - EUT does not address these effects o Framing Effects = Changes in decisions made as a function of different presentation forms o Doctors and patients varied their ratings of how preferable different treatments were as a function of whether they were described in terms of probability of living versus probability of dying o A good strategy may be to try to develop multiple frames o Framing can be seen with Sunk Costs - some resource that has already been spent pursuing a goal

CHAPTER 14 NOTES The only thing that should matter in a decision is how you would like to use future goals not base decisions off sunk costs Degree to which people were able to forget about sunk costs were correlational with their salary It is important that some tasks may involve initial spending or negativity to bring on a better reward Evidence also shows that animals and children do not attend to sunk costs when making decisions Summary - Various phenomena shown choices are often inconsistent in a way that cannot be handled by expected EUT Prospect Theory This modifies EUT to make it compatible with psychological data Tversky took just this approach in dev a descriptive theory of human decision called Prospect Theory o This theory aims to account for the non-normative aspects of decision making that caused problems for expected utility theory, while still maintaining the basic framework of EUT Prospect theory makes 2 key adjustments : 1 . Utility of each outcome is evaluated by a reference point rather than absolute utility. 2. Utilities are not multiply by objective probabilities but rather by a distorted "psychological probability" Pie function can account for the certainty effect because objective probabilities cannot simply be broken down into additive constituents SUMMARY _ This theory handles certainty effects by assuming a pie function that departs from objective probability and addresses at least some framing effects by idea that reference points can be altered Regret Theory o Address certainty effects by describing decisions situations in terms of anticipated reaction to various outcomes o Regret Theory = suggests that we overweight anticipated feelings of regret when the difference between outcomes is large Summary - Prospect and Regret theory represent attempts to capture the irrational aspects of human decision making Decision Making Over Time Many decisions people face involve time There has been shown distinctive framing effects involving options unfolding over time People prefer valuable outcomes sooner rather than later but they also prefer outcomes to improve over time Summary - The idea that people's decision making always optimizes either objective or subjective utility is simply incorrect The computational costs of picking the very best alternative are prohibitive and there is every reason to expect that human making is guided by heuristics Dealing With Complexity Strategies for dealing with complexity o Satisficing - abandon a goal of making the optimal choice in favor of one that is satisfactory search through a set of alternatives until a satisfactory is found The satisficing strategy implies a very strong sensitivity to the exact sampling procedure, such as which factors are used to reduce the pool o Eliminating by Aspects - procedure focuses not on the overall desirability of choices but rather on the individual aspects of components

CHAPTER 14 NOTES Some aspect is chosen and all others that fail to have this aspect are eliminated and this carries on until a single choice is had Non-optimal because it depends on the order in which various aspects are considered Optimal decision rule would pick the best choice regardless of order o Adaptive decision making - There is evidence that people adjust their decision-making strategies in an adaptive manner The reason is that normative procedure take considerable time and the simulation had to pick at random when time ran out Normative models do not take into account the costs associated with gathering and eval info Where time costs are crucial, normative models may be inappropriate Under time pressure in complex environments , strategies shifted toward simplifying heuristics Further Heuristics and Biases Cognitive heuristics are easy or natural ways of thinking that are very often useful and powerful These shortcuts may lead to oversimplification/misperceptions o Very strong in 2 senses: They are used by experts in technical areas and novices at same time 2; They are difficult to overcome o 2 sided - They are very effective and also very misleading in other cases o Last 3 decades has led to major shift in our thinking about human bias o Latter view gave rise to certain human shortcomings such as prejudice o Initial work on decision making was based on determining what the optimal procedure would be in a given situation but it soon became clear that people do not typically perform optimally Availability Heuristic - refers to tendency to form a judgment on the basis of what is readily brought to mind o As long as retrieval process in unbiased then this works quite well o Anything that leads to bias will cause incorrect judgments o "Solo" or token members - If one words is different from others in some way then that word will be remembered more so than the others (VanRestorff Effect) o Study showed that solo members were perceived as having been more active and influential during the discussion than the same stimulus person in the fully integrated group Representativeness Heuristic - refers to a tendency to judge an event as likely if it "represents" the typical features of its category o Conjunction fallacy - Probability of conjugated event cannot be any more probabilistic then the basic form of itself o Misconceptions of Chance - Random patters will appear non-random and people may attribute the apparent pattern to a cause which is wrong This ideas that prior outcomes can influence the outcome of probabilistic events is known as Gambler's Fallacy Anchoring and Adjustment - Start with initial estimate then adjust to the light of a new final estimate - People fail to make appropriately large adjustments o An important aspect and wrong of this method is that we may be influenced by the anchor when these anchors are generated by biased source or arbitrary Causal Schemas - term used to refer to a tendency to expect predictions to be more accurate when they are presented in a way that is consistent with one's expectations about causes or notions about underlying stability - There is no basis for expecting any differences in predictability

CHAPTER 14 NOTES A key aspect of causal schemas is that they can lead people to ignore other potentially relevant information Hindsight Bias - Tendency of people to think after the fact they would have known something before the fact when , in actuality, they would not have o Hindsight groups after a study were unable to disregard info about the correct diagnosis Overconfidence - Part of problem is hindsight bias and other part importantly is experts do not receive feedback on their judgments and therefore do not know when they are in error Relativity Judgments and Use of Norms o Judgments are often based on norms or standards that are retrieved by the events themselves o Clearly some judgments are based on more than outcome alone o People form judgments based on comparisons of alternative possible worlds where the possible worlds are based on imagined changes from the present o This is known as mutability - Determined by info in background scenario may be less mutable than the aspects that are the focus of attention can lead to systematic biases Are There Kinds of Decisions ? Another perspective is that there are different decisions that can't be learned by EUT From study , decision making was more a function of how the game was interpreted than objective costs and benefits Fiske proposed that rules governing decisions and exchanges are a function of the kinds of social relationship involved Violations of these rules of exchange are met with confusion or anger Mental Accounting - Refers to the fact that people tend to treated financial resources as falling into distinct accounts or categories that are not completely interchangeable - Violates standard econ theory which treats money as money o People treat gift money differently from wages is good examples of mental accounting Summary Peoples judgments are susceptible to many different context effects and standard financial theory is actually very different from the way humans make decisions
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