Rationality

Question 1

Describe the bets:
25% chance of winning $16
50% chance of winning $10
75% chance of winning $4

Answer 1

Most people choose bet b, has the greatest expected value

Question 2

Describe expected value theory:

Answer 2

We should:
Calculate the monetary value of each option
Calculate the probability of obtaining that object
Compute the expected values by multiplying 1 and 2
Choose the option with the greatest expected value

Question 3

Describe the value vs utility bet
50% chance of winning $190
90% chance of winning $100

Answer 3

Despite option a having a greater expected value, most choose option b, the utility of five extra dollars is not worth the added risk of winning nothing

Question 4

Describe expected utility theory

Answer 4

Options are weighted by their utility to the decision maker: (for example, amount of money earned can be more drastic depending on the person’s financial situation)
Focus on relative preferences, not absolute ones

Question 5

Describe the principle of transivity

Answer 5

If a>b and b>c, then a>c

Question 6

Transitivity defines the _____ model of behavior

Answer 6

Transitivity defines the normative model of behavior/behavior you ought to engage in

Question 7

What is the difference between the normative and descriptive

Answer 7

Normative model: what we should do
Descriptive model: what we actually do

Question 8

Discrepancies between normativre and descriptive models are considered?

Answer 8

Instances of irrationality

Question 9

Provide three instances of violated normative models

Answer 9

Preference reversals (inconsistency across decisions/decisions framed differently)
Framing effects (same options framed differently)
Context effects (more options for comparison)

Question 10

Describe preference reversals in Shafir 1993 (court case study)

Answer 10

Jury of an only child sole custody case following a divorce:
Parent a: average health, working hours, social life, income, reasonable rapport
Parent b: minor health problems, lots of work-related travel, very active social life, above-average income, extremely close to child
More people awarded custody to parent b, however, they were then asked who they would deny sole custody, they chose parent b as well: focus on positive extremes for offering sole custody, focused on negative extremes for denying sole custody for parent B. Violates transitivity, prefer A when denying custody and prefer B when giving custody

Question 11

Describe the dictionary study

Answer 11

One dictionary has more dictionary entries but has a torn cover, but the other has less but does not have a torn cover. When participants were assigned a dollar amount, they assigned a higher dollar amount with more words in joint scenario, but assigned a higher dollar amount with less words in a separate scenario. Preferences change when the value of the attribute becomes apparent

Question 12

Describe framing effects with the unusual disease scenario

Answer 12

If program a is adopted, 200/600 people would be saved, If program b is adopted, 600 people would be saved 33% of the time, and no one would be saved. People think it’s better to save 200 lives. Then, asked with different framing: 400 people will die, 1/3 chance of everyone being saved. Technically the same decision, most participants preferred the risky options. When framed as lives saved, certainty is preferred to risk. When framed as lives lost, risk is preferred to certainty. Very robust effect, even in philosopher

Question 13

Look at the difference in organ donors across countries.

Answer 13

Some places have large discrepancies in organ donors- some places are opt-in or opt-out. Opt-in: check the box to be a donor, opt-out: don’t check the box to be a donor. Organ donors are scarcer in opt-in countries

Question 14

Describe context effects in decision making

Answer 14

A metal pen worth $2.00 vs $1.50 in cash. Most participants chose the pen 75% if the time. Then there is a third option: 2.00 metal pen, two plastic pens worth $1.00, $1.50 in cash. Then most participants chose the cash. This may be because the option of one nice pen vs two bad pens, opt out and end up choosing the third option. The difficulty between two similar options was avoided by choosing a third

Question 15

Describe context effects within the workplace in Austin et al.

Answer 15

You have always received $2 per hour n the past, however your coworker gets 2.50 per hour. Most participants are extremely dissatisfied. In one condition, you’re making more money you are more satisfied, if you’re making the same amount you are similarly satisfied, less satisfied when they make less than coworker. More than last year/equal to last year similar to satisfaction, less than last year also less satisfied, but less so when you make less than a coworker. Shows an effect of social comparison

Question 16

What are the two problems with expected utility theory?

Answer 16

People do not derive the expected utility of each option independently, context and framing matters.
People do not weigh options by their true probabilities, certainty looms larger than uncertainty.

Question 17

Describe Kahneman and Tversky’s modifications to the utility theory/prospect theory

Answer 17

The utility of an outcome is evaluated with respect to a reference point rather than an absolute criterion
Options are weighed by subjective probability, not objective probability

Question 18

Describe reference points in assigning utility

Answer 18

Losses loom larger in our heads than gains do: gaining $5 has less of an effect than losing $5

Question 19

Describe subjective probabilities in prospect theories

Answer 19

Bow shaped curve: 50% probability transfers to a 1/3 decision rate. When you get a higher success rate, you overrate the result even if the vaue is less

Question 20

What is the classic example of loss aversion?

Answer 20

lives saved vs lives lost program
People will take a risk to avoid a loss but will not take the same risk if the loss is framed as a gain

Question 21

Provide a real life example of loss aversion

Answer 21

People are more likely to make a putt when putting for a par (over par is bad) than putting for a birdie (one under par). Putting for birdie is less aversive than putting to be over a par.

Question 22

What is the question of Kerner?

Answer 22

Is loss aversion an affective forecasting error?

Question 23

What is affective forecasting error?

Answer 23

We are bad at predicting how emotional over a loss. We get over losses quick

Question 24

What are the alterantives of kerner et al?

Answer 24

Losses loom larger than gains because people do not realize how they minimize rationalize losses
No, loss aversion stems from other error or bias such as a hoarding instinct

Question 25

What is the logic of kerner et al?

Answer 25

If loss aversion is an affective forecasting error, then the predicted impact of a loss shouldd be greater than its actual impact

Question 26

What were the methods of Kerner et al?

Answer 26

Undergraduates were introduced to a gambling game that resulted in a $4 gain or $4 dloss. Half the experimenters started with $5 and reported how happy they felt after the game. Half the forecasters watched a simulated game and reported how happy they’d feel had they played. Experiment 2 had everyone undergo this experiment

Question 27

What was the results of Kerner et al?

Answer 27

If you won, you become more happy, if you lose be slightly sadder. Forecasters assumed that people would feel much worse after a four dollars. Forecasters failed to see how easily the loss can be rationalized (you’re still gaining money)

Question 28

What is the inference of Kerner?

Answer 28

Loss aversion is indeed an affective forecasting error. Leads us to make decisions that maximize neither our wealth nor our happiness.