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Definition
| A Choice among possibilities. It involves assessment of the courses of action available and a determination of the action (or nonaction) to take. Decision making has a lot in common with other complex cognitive skills such as problem solving and reasoning, and so psychological theories of decision making propose an interesting mix of rational and cognitively plausible mechanisms. |
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| Prescriptive (Normative) Theories |
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Definition
| Theories that tell us how we should decide - they stand as some of the most successful ever invented by human beings. They were also used as initial hypotheses to describe actual human behavior. |
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| Theories which focus on how we actually make decisions, not on how we should make them. They have, since the 1970s, increasingly informed our understanding of decision making. These theories have led to research that has revealed how human behavior departs from the prescriptions of entirely rational choice. |
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| Graphical display that conveniently summarizes the components of a decision. Represent the courses of action or options under consideration, the likelihood of what we will get if we choose each course of action, and the consequences that follow each choice. |
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| Different courses of action, options, choices, and strategies available to the decision maker. Represented as branches of the decision tree. Though we have an infinite amount of these, we usually consider only a few of them when we make a deliberate decision. |
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| Our estimate of the likelihood that a particular outcome will occur if we choose a particular alternative. |
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| The benefits or losses that you receive or experience form the choice of a particular alternative and the events that follow from that choice. In the vocabulary of decision theory, these are described as outcomes, values, or utilities. |
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| The result of a consequence. |
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| The net worth of a consequence. |
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| The desirability of a consequence. |
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| The utility of a particular outcome, weighted by the likelihood of that outcome's occurring. |
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Term
Expected Utility Model
How the Model Works
(1) Evaluate each course of action under consideration by multiplying the utility of each of its consequences (accept, reject) by its probability of occurrence (0.6; 0.4).
(2) Add these weighted values - the expected utilities - to create a summary evaluation of each alternative.
(3) Choose the course of action with the highest expected utility, that is, the one with the largest sum of probability-weighted utilities.
The Equation
The expected utility of an action is equal to the sum (∑) of the probabilities (p) of each possible outcome (xi, where the subscript i is a variable representing each possible outcome) multiplies by the utility (u) of that outcome. Thus,
Expected Utility = Σp(xi)u(xi)
(Read section 2.1 for more information on this process)
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Definition
| Provides the framework for most models of decision making. Assumes rational behavior on the part of the decision maker in evaluating the likelihoods of alternatives, assessing the consequences, assigning utilities, weighting or multiplying the utilities by the likelihoods, and then finally choosing the option with the highest expected utility. It is inherently subjective: the question "What's it worth to you?" sums up the idea of the subjective utility. Meaning, the central issue is not simply value, but value to you, the decision maker. Thus, it varies from person to person, circumstance to circumstance. |
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Term
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Definition
Also known as risk attitudes; the difference in attitudes toward the variance (a formulaic calculation that describes the range between possible payoffs) from person to person.
Ex. Some people prefer gambles with a small range in possible payoffs; others choose high-variance gambles, with high potential wins and high potential losses.
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Term
Risk Averse
Side Note: Most people are risk averse for gains. |
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Definition
Describes the preference for receiving a small, certain gain to the chance of getting a large, but uncertain, gain.
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Risk Seeking
Side Note: When losses are involved, people are generally risk seeking - that is, in preference to the certain loss of a given amount, they accept the chance of a greater loss if a lesser loss is also a possibility. |
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Definition
Describes the preference for receiving a larger, but uncertain, gain to the chance of getting a small, certain gain.
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Definition
Decision behavior to avoid a loss, even if the result is a less than optimal choice.
Ex. Some people avoid a gamble with any potential loss outcome, no matter what the expected value and variance of the gamble are. |
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Definition
| The tendency for an item to acquire extra value by virtue of our possessing it; the effect has been used to explain why sellers often put a higher price on items than buyers do. |
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Definition
| Our estimates of the likelihood of various outcomes of a decision. In assigning these weights, we apparently have a general tendency to over-weight small probabilities, to be insensitive to middle to high probabilities, and to over-weight certain outcomes (for example, when asked to estimate the likelihood of various causes of death, participants tend to overestimate extremely unlikely events, such as tornadoes, earthquakes, etc.). |
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Experienced Utility
Note: In well-adapted organisms, anticipatory decision utility should predict experienced utility to some degree, and probably both evaluations would involve some of the same brain structures. |
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Definition
| The reactions (in terms of their value or worth) to rewarded events when they are received. |
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Decision Utility
Note: In well-adapted organisms, anticipatory decision utility should predict experienced utility to some degree, and probably both evaluations would involve some of the same brain structures. |
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Definition
| The anticipation, at the time a decision is made, of the expected subjective value or worth of a particular outcome. |
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Definition
"If the red ball is larger than the yellow ball, and the yellow ball is larger than the green ball, then the red ball is larger than the green ball."
This principle states that if a "greater-than" relation holds between a first element and a second one and between that second element and a third one, then it must also hold between the first element and the third one.
In terms of decision making, think of it like this: "If I prefer X over Y, and Y over Z, then i should prefer X over Z |
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Definition
"Two ways of asking the same question about preferences should produce the same answer"
Sometimes this is not always the case, as shown by the example on page 387 involving gambling. |
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Definition
| Choice processes that are rational as they can be, given cognitive limitations on the amount of information we can process. |
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Definition
A method that finds not necessarily the best of all possibilities, but one that is good enough to meet the desires of the decision maker.
This is considered an algorithm (step-by-step recipe for making a decision). Say you're looking for an apartment. First, determine what characteristics of an apartment are important to you (rent, distance, number of rooms, etc.) Then, set the criteria for acceptability on each important attribute (not more than a third of your budget, walking distance, etc.) Finally, consider the available choices one at a time until an option is found that is "good enough" on the important attributes - and quit the search. The winner is the first candidate that meets your minimum requirements. |
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Definition
Another way people seem to balance cognitive effort and desirability of outcome (the other being satisficing). It is a strategy that successively evaluates a possible choice on a number of attributes, eliminating the choices that do not measure up to the decision maker's criteria for each attribute.
For instance, say you want to buy a car. Here's how it works: First, decide which attribute of the candidate options is most important to you (cost, color, four-wheel drive, etc.). Then, run through the options now available to you and decide where the options are on that attribute, eliminating all options that are significantly worse in this respect. Then, consider the second most important aspect and eliminate again. Keep this up until only one winner is left. |
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Term
| Fast-and-Frugal Strategies |
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Definition
| Gerd Gigerenzer has shown that we can make surprisingly accurate judgments, relying on as little as one piece of information, if we know the right piece. So, the interesting hypothesis is that experience "tunes" us to the most important cues in our environment and thus allows us to rely on simple and not obviously optimal judgment and choice strategies. These ______________________ strategies often perform as well as more demanding rational algorithms, and they also provide more valid descriptions of human decision making behavior than does the expected utility model. |
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Definition
| Simple and efficient rules of thumb that work well in most decision-making circumstances. |
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Definition
Implies that a decision problem described by different but logically equivalent statements nonetheless should lead to the same choices.
However,
This is not true of human perception: a single visual scene may be viewed from different perspectives, leading to different mental representations and different actions. The same turns out to be the case for situations that face decision makers. |
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Definition
The influence of the various ways a problem may be put.
These have long been concerns of pollsters, because the answers to survey questions depend on the exact form of the question put to respondents. Ex. "To what degree do you support the president's plan...?" usually gets a very different estimate of support than the equivalent "To what degree do you oppose the president's plan...?"
Response to advertisement are also sensitive to this effect; hamburgers sell at a much slower slower rate when described as 90 percent lean versus 10 percent fat. |
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Definition
The most influential theory of decision making in the face of risk and uncertainty.
It is a modern descriptive theory of decision behavior that updates the standard economic model of expected utility theory by assuming that we experience losses more keenly than gains of the same magnitude, that we are risk averse for gains and risk seeking for losses, that we use decision weights instead of objective probabilities, and that our decisions are often made from the perspective of a reference point. |
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Definition
The current situation before the decision is made.
A novel assumption of prospect theory is that this reference point is not fixed, but rather is frequently updated. Thus, prospect theory explains the endowment effect - the added value we confer on something in our possession over something we have not yet acquired - by our updating of our reference point as a new possession is obtained. |
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Term
Allais Paradox
Check out the situational experiment on page 393. |
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Definition
The apparent contradiction observed when the addition of the identical event to each alternative has the effect of changing the preference of the decision maker.
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Definition
Theory in which anticipated emotions, especially regret and disappointment, replace utility as the carriers of value, has been proposed.
Why are some people so much more afraid of flying than driving an equal distance when we all know that driving is more dangerous? It's head vs. heart, and the emotional heart often wins. |
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Definition
The tendency to devalue outcomes that occur further in the future.
Most people would rather take $20 now than $50 in 3 months. |
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Definition
Reversed preferences between identical outcomes depending on time.
Ex. Most people would take $15 dollars in 42 days over $10 in 30 days.
This inconsistency is contrary to a rational analysis, where the standard economic models predict consistency.
Shows that when an outcome is immediate, an emotional system controls our behavior and leads us to choose the immediately available gratification, but when gratification is not immediately available, our cooler, rational system takes over and we choose wisely. |
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The Ellsberg Paradox
Read the bit on 398 about Ellsberg's ambiguous urn |
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Definition
The choice of certainty over ambiguity even when the result is an inconsistent pattern of choice.
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Definition
Heuristics that infer we rely on cognitive capacities for retrieval from memory, for similarity assessment, and for figuring out causes for events.
This sends the message that people are not naturally endowed with intuitions that obey the laws of mathematical probability theory. |
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Definition
| One type of heuristic for judging likelihood in which we try to assess the likelihood that a particular event will occur by relying on the easy in which relevant exemplars can be retrieved. Thus, we substitute ease of recall for a systematic assessment of the probability of occurrence. |
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Term
| Representativeness Heuristic |
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Definition
One type of heuristic for judging likelihood in which we infer a person's social category from the similarity between that person's appearance and our prototype of a category member.
E.x. "Jane is always fashionably dressed and coiffed, wears makeup, and has manicured nails, so we guess she belongs to a sorority. |
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Definition
One type of heuristic for judging likelihood that involves reliance on causal relationships and simple causal models.
"What is more likely, that if a mother has blue eyes, then her daughter has blue eyes; or that if a daughter has blue eyes, then her mother has blue eyes"? The strong intuition is that it is more likely that if the mother has blue eyes, then the daughter will too. However, under conditions that hold in most human populations, the probability is the same for the blue-eyes trait, mother-daughter or daughter-mother. |
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Definition
| Theory that specifies how we combine beliefs about likelihood derived from multiple sources and based on several underlying cognitive capacities into a summary "strength of belief" for decision-making purposes. |
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