Psychology 3130A/B Lecture Notes - Lecture 9: Risk Aversion, Loss Aversion, Diminishing Returns
22 Jun 2018
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Week 12/Chapter 9: Decision-Making
Basic Topics covered:
- Probability
- Base rates
- Decision-making (decisions)
oNormative/Expected Value
oHeuristics and Biases
- Prospect Theory & Knowledge effects
Making A Decision
- What is decision making?
oReducing uncertainty & maximizing outcome
- Identification phase – person identifies the need to make a decision
oFraming – involves stating the decision in terms of known costs and benefits or perceived gains
and losses (affected by Semantics and Linguistic Factors)
- Generation stage – decision maker begins to generate alternative options
oAffected by 3 effects:
Individual effects (randomness involved by the individual’s decision making process not
be the same as another’s)
Cognitive biases (mistakes in reasoning due to preferences and beliefs)
Environmental biases
- Judgment/Evaluation phase – alternatives evaluated.
oJudgments made about: probabilities, consequences (can be immediate or delayed), risk/benefits
and the value of alternatives
- Availability and representativeness – options that are more available in memory are likely salient
examples and therefore bias
- Selection
oOnce decision is made, the decision-maker can engage in:
Re-evaluation
Re-framing
Regeneration
Action
Check the outcome
- Difficulties and Challenges
oIn general people make good decisions
Too many choices can cause problems
oChallenges arise when costs and benefits are comparable across many alternatives (trade-off
conflict) or when alternatives are dependent on uncertain variables or events (uncertainty)
Understanding Probability
- Probability theories (Frequency, Logical, Personal) – J. Baron
oFrequency Theories
Suggest that humans make probability judgements on the basis of their knowledge of
prior frequency events
Requires attention in order to encode the event and memory in order to make the
judgement (if no knowledge of past frequency then this theory will not work)
People remember highly salient events and based their judgements of these memories –
availability heuristic
oLogical Theories
find more resources at oneclass.com
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Document Summary
Decision-making (decisions: normative/expected value, heuristics and biases. What is decision making: reducing uncertainty & maximizing outcome. Identification phase person identifies the need to make a decision: framing involves stating the decision in terms of known costs and benefits or perceived gains and losses (affected by semantics and linguistic factors) Generation stage decision maker begins to generate alternative options: affected by 3 effects: Individual effects (randomness involved by the individual"s decision making process not be the same as another"s) Cognitive biases (mistakes in reasoning due to preferences and beliefs) Judgment/evaluation phase alternatives evaluated: judgments made about: probabilities, consequences (can be immediate or delayed), risk/benefits and the value of alternatives. Availability and representativeness options that are more available in memory are likely salient examples and therefore bias. Selection: once decision is made, the decision-maker can engage in: Difficulties and challenges: in general people make good decisions.
