TASK 5 - DECISION MAKING

Question 1

decision making

Answer 1

= process of selecting a choice from all the available options

Question 2

stages of decision making

- theory of natural decision making

Answer 2

1. setting goals: goals influence decisions; decisions are steps toward something you want to accomplish
2. gathering information: know what the options, consequences are
3. decision structuring: organise all information (listing options + criteria for deciding among them)
4. making final choice
5. evaluation
   √ flexibility in phase order (if struggling, returning to previous phases)

Question 3

cognitive illusions

Answer 3

= errors of cognition that come about for understandable reasons and that provide information relevant to understanding normal functioning –> systematic biases
- heuristics = rules of thumb; strategies that ignore part of the information with the goal of making decisions more quickly

Question 4

cognitive illusions

- framing effect

Answer 4

• description frames the decision (e.g. 2 gas stations)
• “context effect” in decision making
• changing description can lead people to adopt different reference points
• loss aversion

Question 5

cognitive illusions

- anchoring

Answer 5

= rely too much on an initial piece of information offered (= anchor) when making decisions

Question 6

cognitive illusions

- sunk cost effects

Answer 6

= greater tendency to continue something once one has invested in it
- due to emotional investment, you are too invested in one ida and unwilling to quit

Question 7

cognitive illusions

- illusory correlation

Answer 7

= seeing a relationship between variables even when there isn’t any
- typically have some prior associations in peoples’ minds

Question 8

cognitive illusions

- hindsight bias

Answer 8

= tendency to exaggerate what could’ve been anticipated in foresight when looking back in hindsight
- once you know how a decision turned out, events leading up to outcome seem more inevitable than they really are

Question 9

cognitive illusions

- confirmation bias

Answer 9

= only gather information consistent with prior hypothesis/information confirming previous idea

Question 10

cognitive illusions

- overconfidence

Answer 10

= people’s impressions of own accuracy are inflated; arrogance
- fail to see need for help

Question 11

cognitive illusions

- omission bias

Answer 11

= tendency to prefer inaction to action when engaged in risky decision making
- anticipated regret: greater when unwanted outcome caused by own actions rather than inaction
- status quo bias = decision avoidance; preference for maintaining the status quo (present state) rather than acting to change one’s decision
x action bias = don’t just sit there, do something

Question 12

cognitive illusions/bounded rationality

- saitsficing

Answer 12

= strategy that aims for a satisfactory/adequate result, rather than the optimal solution

• “good enough” rather than expending effort/resources on finding best possible/optimal choice
  1. satisficers = people content with making reasonably good decision; were happier and more optimistic, greater life satisfaction, less regret (not found in Chinese)
  2. Maximisers = perfectionists
• Simon

Question 13

cognitive illusions

- fast-and-frugal heuristics

Answer 13

= heuristics involving rapid processing of relatively little information
- take the best, ignore the rest
x why do we have capacity of logical reasoning if we could always follow gut feelings
x more complex than suggested –> often not sufficient knowledge of validities

Question 14

fast-and-frugal heuristics

- availability heuristic

Answer 14

= instances that are more easily thought of/accessible, stand out more in one’s mind

• own behaviours more prevalent to us than that of others
• failure to include base rate info in probability estimation
• availability by recall (number of instances recalled) vs. fluency mechanism (how easy it WOULD be to recall without actually retrieving from memory)

Question 15

fast-and-frugal heuristics

- representativeness heuristic

Answer 15

= representatives/typical members of a category are encountered more often

• failure to include base rate info
• mistaken belief in the law of small numbers: people expect small sample to show same proportions as large sample
• gambler’s fallacy: mistaken belief that if something happens more frequently than normal during a given period, it will happen less frequently in the future
• conjunction fallacy: mistaken belief that the probability of a conjunction of 2 events (A & B) is greater than the probability of one of them

Question 16

fast-and-frugal heuristics

- recognition heuristic

Answer 16

= using knowledge, that only one out of two objects is recognised, as basis for making a judgment; selecting object that is recognised in preference to the one not recognised (recognise cologne not Herne, decide cologne is bigger)
- exploits lack of knowledge
x more complicated than assumed –> consider why they recognise and object + decide then whether to use

Question 17

base rate fallacy

Answer 17

= cognitive error whereby too little weight is placed on the base (original) rate of possibility
base rate information = the relative frequency of an event within a given population

Question 18

utility models

Answer 18

= we try to maximise utility (subjective value we attach to an outcome)

• normative models = define ideal performance under ideal circumstances
• prescriptive models = show how we ought to make a decision (= consider that circumstances aren’t ideal and show how to best decide)

Question 19

utility models

- expected utility theory

Answer 19

= trying to assess the subjective utility of certain objects

• normative model: ideal performance under ideal circumstances
• expected value (EV= ∑(p×v)): determine to choose the one with the higher value & see how much money you should spend
• expected utility (EU= ∑(p×u)) = (probability of a given outcome) x (utility of the outcome): captures ideas of happiness, pleasure & satisfaction that comes from achieving goals (= psychological rather than monetary value)

Question 20

limitations of expected utility theory

Answer 20

x calculation of EU difficult: info about several aspects of the decision must be integrated (various factors and goals)
x only accounting for making final selection from a set of alternatives –> not making decisions with “status quo vs. make a change” option
x doesn’t describe processes by which people structure a decision (= gather info and lay out possibilities + parameters)

Question 21

utility models

- multi-attribute theory (MAUT)

Answer 21

• ideal strategy –> bounded rationality (more realistic)
  1. break a decision into independent dimensions
  2. determine relative weights of each dimension (= subjective value)
  3. list all alternatives
  4. rank alternatives along dimensions
  5. multiply ranking by weighting of each alternative to determine final value
  6. choose alternative with highest value
• normative model: if people follow MAUT they will maximise own utility in a way that is best for achieving all their goals
• dimensions must be chosen carefully
• person would be willing to choose an alternative that was not highest on the highest ranked dimension when the relative position on other dimensions compensates for that

Question 22

limitations of multi-attribute utility theory

Answer 22

x elimination by aspects (descriptive model): when decision makers have too much info to deal with they don’t take all dimensions into account but rather select one factor, pick a threshold value and everything that exceeds that threshold value is tossed
x Homo economicus assumed: too rational
x procedure too complex
x set of relative dimension can not always be worked out; not clearly separate from each other

Question 23

descriptive models

Answer 23

= simply detail what people actually do when they make decisions (= actual performance); what people ACTUALLY do

Question 24

descriptive models

- bounded rationality

Answer 24

= people are as rational as their processing limitations permit

• produce reasonable/workable solutions to problems in spite of our limited processing ability (heuristics)
• unbounded rationality = if all the information you need, could choose best choice
• Simon

Question 25

limitations for rational decision making

Answer 25

- cognitive constraints: limited capacities for information processing - environmental constraints: not enough information about alternatives + consequences; limited time/resources - -> use of heuristics

Question 26

descriptive models | - image theory

Answer 26

- pre-choice elimination = ask themselves whether a new goal/plan/ alternative is compatible with 3 images 1. value image: decision maker’s values, morals, principles 2. trajectory image: goals & aspiration for the future 3. strategic image: way in which decision maker plans to attain his/ her goals - incompatible with at least one of images drop out from further consideration

Question 27

descriptive models | - recognition-primed decision making

Answer 27

= experts most likely rely on intuition, mental simulation, making analogies, recalling/creating stories when deciding; compare/recognise current situation to one encountered before - expert decision making - relevant when decisions must be made rapidly - when situation familiar/typical: experts match situation to learned patterns of information stored in LTM (pattern recognition) --> retrieval of a single option --> mental stimulation --> if imagined outcome satisfactory that option determines actions - when situation not familiar: diagnose situation further (story building, more data) - Klein

Question 28

descriptive models | - prospect theory

Answer 28

= decisions based on evaluation of potential value of losses and gains, using heuristics - editing: identify reference point (subjective), generally representing current state - evaluation: loss aversion - Kahneman; graph x partly explains value function x does not include social/emotional factors x framing depends on individual differences x probability of rare events is underrated

Question 29

descriptive models | - constructivist approach

Answer 29

= cultural representations are dynamic schemas rather than ever-present personality traits; switch between cultural frames in response to situational cues - explains how people can be fluent in more than one culture without simply blending their biases

Question 30

self-other decision making

Answer 30

= making choices for others involves less loss aversion than making choices for self - making decisions for others gives us a feeling of power which makes us less sensitive to losses + seek more info when making decisions for others - omission bias greater for self

Question 31

self-construal priming on risk taking

Answer 31

= everybody has 2 co-existing selves in their memory: one independent + one interdependent - cultural differences stem from likelihood of sampling one or the other (depending on social role & situation) 1. primed on an interdependent self: less likely to take social risks than those primed on independence 2. primed on interdependence: more likely to take financial risks - cushion hypothesis: social network acts as safety net; riends & family members offer a cushion that lessens effect of financial loss but magnify embarrassment of a social misstep

Question 32

dual-process theory | - Kahneman

Answer 32

system 1: intuitive, automatic, effortless; heuristic-based system 2: analytical, controlled, rule-based; more concscious - serial processing x assumes that people mostly use system 1 x oversimplification: people also rely on base-rate information in system 1/rapid judgments x people can show strong biases even when using system 2 --> error-prone performance not only system 1 x serial processing is difficult to detect

Question 33

endowment effect

Answer 33

= tendency for owners (potential sellers) to value objects more than potential buyers; simply owning an object can enhance its perceived worth = self-object-association + self- enhancement bias = enhancement of object’s perceived value - smaller effect for Easterners (= faster in switching technologies etc.) --> interdependent self: self-criticising --> independent self: self-enhancing

Question 34

natural frequency hypothesis

Answer 34

= better/more accurate judgment with natural frequencies than percentages - people are naturally equipped to think about frequencies rather than probabilities x benefits of frequency formats do not occur when using steps to avoid obvious version x truly natural sampling may not be possible at all x high demands on memory

Question 35

rational-emotional model

Answer 35

= account for decision avoidance; decision Making based on rational factors - omission + status quo bias: explained with regard to regret and fear (= fear can be reduced when someone decides not to make a decision at that time)

Question 36

social functionalist approach

Answer 36

= takes into account social context of decision making | - people = intuitive politicians --> justify decisions to others

Question 37

nudging

Answer 37

= steer people in a particular direction while still allowing them to go their own way (a subtle way of influencing behaviour); help them make good decisions without coercing them - alter “choice architecture” (= background against which choices are made) - default rules/ options: option a decision maker will obtain if he/she does nothing - -> establish status quo/reference point for counting changes as losses or instead as gains - -> depends on the costs of the decision + the cost of error - -> often thought to be most effective nudge (fail when strong antecedent preferences or opposed with counternudges) - Thaler - uber tricks

Question 38

nudging ineffective when…

Answer 38

x based on inaccurate understanding of behaviour x info is too confusing/complex (unaffected by it) x people show reactance: reject an official effort to steer just because it’s an official effort to steer x they have short-term effect x it influences desired conduct + produce compensating behaviour (rebound effect) --> nullifies overall effect

Question 39

responses to failed nudging

Answer 39

1. do nothing: failure might show that there is no problem at all 2. nudge better/different when convinced that people’s choice is not promoting their welfare 3. fortify/defend effects of nudge with a more aggressive approach (e.g. counter-counternudges or bans)

Question 40

availability heuristic | - support theory

Answer 40

= event appears more/less likely depending on how it is described; distinguish between events and descriptions of those events - more explicit event descriptions have greater subjective probability, BECAUSE 1. explicit description often draws attention to aspects of the event less obvious in non-explicit description 2. memory limitations prevent people from remembering all the relevant info if it is not supplied x oversimplification x explicit descriptions can reduce subjective probability if they lead individuals to focus on low-probability causes; if they are hard to understand

Question 41

dual-process theory | - logical intuition model

Answer 41

= there is rapid, intuitive processing (system 1) of heuristic and intuitive logical processing (base rates) which is sometimes followed by deliberate system 2 processing improvements to dual-process: √ heuristic and base-rate information can both be rapidly accessed through intuitive processing

Question 42

prospect theory | - loss aversion

Answer 42

= treat losses more seriously than gains of the same amount (care more about losing than winning a dollar) - loss neutrality = participants do not favour one option over other unless stakes are high

Question 43

bounded rationality | - elimination-by-aspects theory

Answer 43

= decision makers eliminate options by considering one relevant attribute/aspect after another √ useful at early stages

Question 44

elimination-by-aspects theory | - two-stage theory

Answer 44

= modified version of elimination-by-aspect 1. initial stage: elimination-by-aspects --> only options meeting certain criteria are retained - reduce options to manageable number 2. second stage: detailed comparisons of patterns of attributes of retained options - -> few options switching to more complex strategy (multi-attribute utility theory)

Question 45

different search strategies

Answer 45

1. focused search: focus on small number of carefully selected potential options a. correlated positively with satisfaction with option 2. exploratory search: taking into account several options making use of several information sources 3. haphazard search: non-strategic approach; resembles trial and error a. correlated negatively

Question 46

unconscious thought theory

Answer 46

= conscious thinking is constrained by limited capacity of consciousness; unconscious thinking is better at integrating large amounts of information - conscious thought can follow strict rules (well suited to rule-based problems) - unconscious though better when decision complex - optimal: combination of conscious + unconscious thought x inconsistent findings x rely heavily on intuitive processes