assumes you make a decision to maximise gains and/or minimise loss.
To make a decision, you need to take into account the value of the gain or loss and the chance of that actually happening.
Fails to take into account psychology
Deal or No Deal- game players should decide based on multiplying the value by the probability. Post et al (2008): decisions based on the value in the box & what happened earlier.
Loss aversion (Tversky & Shafir, 1992)
Sunk cost effect (Dawes et al.,1998)
Over-confidence- in own decision-making performance.
Framing effect- affect a decision, based on how data is presented
Assumes people are rational, but they are not!
1 of 7
Prospect Theory: Kahneman & Tversky
Two key assertions:
people identify a reference point that generally represents their current state
people are more sensitive to potential loss than potential gains (loss aversion)
People underestimate the value of gain and are more sensitive to potential loss
Kermer et al. (2006):
People expect losses to reduce happiness more than gains will increase happiness.
Study: People hugely overestimated (x4) how bad they would feel if they lost
Limitations
Doesn't explain why we are loss averse
ignores emotional factors in decision making
ignores individual differences in willingness to take risks.
2 of 7
Emotions on decisions
Current Emotional State
Bower (1981): make optimistic gambles when happy, and conservative gambles when sad
Shiv et al (2005):
Patients with damage to emotion regions, damage to other brain areas and neurotypical Ps.
Give $20 and can invest $1 each time. Heads lose $1, tails win $2.50.
Neurotypical: invest 58%. Damage to other areas: invest 61%. Damage to emotion regions: Invest 84%.
Emotions make us excessively afraid of losses. Lesions to emotion areas remove loss aversion resulting in better decisions.
Somatic Marker Hypothesis
Each option retrieves an emotion associated with past experiences. Retrieved emotion includes peripheral arousal (somatic marker). Somatic marker biases decision making. Fast, adaptive, limit resources needed.
3 of 7
trust on decisions
Zak et al. (2004)
Role of oxytocin in the level of trust. Found that increased oxytocin after Ps received a gift, leading to them giving more money away. Receiving a signal of trust from a stranger makes people feel more positive about them, leading to more oxytocin.
Dimoka et al (2010):
the network of brain regions involved with trust and distrust
Trust
Caudate nucleus- anticipating a reward
Anterior cingulate cortex- predicting behaviour
Orbitofrontal cortex- willing to be vulnerable
Distrust
Insular cortex- worrying about behaviour (fear of loss)
Amygdala- negative emotions of wariness, caution, anger, betrayal, etc.
4 of 7
trust on decisions
Dimoka et al. (2010)
Participants paid less to untrustworthy sellers
Activity in areas associated with distrust (amygdala and insular cortex) best-predicted buying behaviour.
5 of 7
Complex problems
Multi-attribute utility theory
Wright (1984)
identify attributes relevant to the decision, decide how to weight attributes, list all options under consideration, rate each option on each attribute, obtain total utility by summing weighted value, select one with highest weighted value.
Elimination-by-aspect theory
Tversky et al. (1972)
Eliminate option one-by-one based on a specific criteria
Kaplan et al. (2011)
Two-stage process
Elimination
A detailed comparison of remaining a small number
6 of 7
Complex problems
Memory-guided decision making
uses past experience to make rapid decisions under pressure (used by experts)
Klein (1998)
Elimination-by-aspects is more typical for non-experts
Experts use 'recognition-primed decision model'
Retrieved previous 'similar' situation and evaluate whether the previous decision is appropriate
Experts characterised novel situations as examples of familiar situations
Comments
No comments have yet been made