Making Decisions 1

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  • Created by: angela
  • Created on: 22-05-19 09:08
Rational decision-making
Cost benefit analysis
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Utility
Choose the option that has the highest “utility”, i.e., choose the outcome which has the highest value
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Subjectivity
Things have different values to different people £10 is worth more to a homeless person than a rich man
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Uncertainty
If I stay home tonight, how likely is that that I will improve my grade?
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Subjective Expected Utility Theory
Calculate: probablity * value of outcome For example: Value of getting better grades x probability that staying home tonight will improve your grades Choose the option that has the highest expected utility for you
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Loss Aversion
We feel stronger about losses than gains (approx. 2 times) Losses have greater weight than potential gains in making decisions
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Certainty Effects
“People overweigh outcomes they consider certain, relative to outcomes which are merely probable” (Kahneman & Tversky, 1979, p. 265) Which would you prefer: You get £100 You have a 50% chance of winning £200 and a 50% chance of winning nothing
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Risky Losses
People are Risk Aversive for Gains and Risk-Seeking for Losses
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Prospect Theory
Describes how people value gains and losses Function is concave for gains: reflects diminishing marginal value and risk aversion. Function is convex for losses: reflects risk seeking
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Loss Aversion
Prospect theory implies that losses have greater weight than potential gains in making decisions. This is reflected in the steeper curve for losses
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Tversky & Kahneman (1981)
Program A: 400 die Program B: 67% that 600 die and 33% that no-one will die. Most people choose programme A - certain
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McNeil et al. (1982) Choosing Medical Treatment
Depending on how the stats/infromation is ramed changes peoples descions depsite the outcome being the same
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Framing Effects and Preference Reversals
People tend to be risk averse when the outcome is framed as a gain and risk-seeking when the outcome is framed as a gain Kahneman & Tversky (1984): This violates the principle of invariance:p’s choices should depend on the situation, not description
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three plants need to be closed and 6000 employees laid off. The vice-president of production has been exploring alternative ways to avoid this crisis. She has developed two plans
Plan A: This plan will save 1 of the 3 plants and 2000 jobs. Plan B: has a 1/3 probability of saving all 3 plants and all 6000 jobs, but has a 2/3 probability of saving no plants and no jobs. - Plan A
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Differently framed (Bazerman, 1982):
Plan C: loss of 2/3 plants and 4000 jobs. Plan D: 2/3 probability of resulting in the loss of all 3 plants and all 6000 jobs, but has a 1/3 probability of losing no plants and no jobs. - Plan
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Other cards in this set

Card 2

Front

Utility

Back

Choose the option that has the highest “utility”, i.e., choose the outcome which has the highest value

Card 3

Front

Subjectivity

Back

Preview of the front of card 3

Card 4

Front

Uncertainty

Back

Preview of the front of card 4

Card 5

Front

Subjective Expected Utility Theory

Back

Preview of the front of card 5
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