Focused thinking is a process from moving to the current state to the goal state
What is good decision making?
- Always make the best choice -> given a set of outcomes we should choose the highest
value
- Make the best choice regardless of how the alternatives are described (the best choice
is the best choice no matter how the choices are phrased)
Ways of Studying Decision making
- Descriptive: ‘what you do’
- Prescriptive: ‘what you should do’
What is an optimal decision?
Rational or Normative Model -> humans are capable of estimating the objective probability of
each outcome, and choose the one which is optimal, says we are perfect at estimating
probability
- Expected Value (certain monetary benefit)
- Expected Utility (non-monetary benefit)
Prospect Theory: probability that people estimate is psychological or subjective, says we are not
perfect at estimating probability.
Rational Model: Expected Value
People set a value for all the alternative and choose the most valuable
Options:
A: Winning $100 with probability 0.10 / else nothing = $10
B: Winning $8 with probability 0.90 / else nothing = $7.20
A has biggest value
Rational Model: Expected Utility
Outcomes depend on goals, not value
Options:
A: Winning $100 with probability 0.10 / else nothing = $10
B: Winning $8 with probability 0.90 / else nothing = $7.20
B has higher likelihood
Violations of Rational Decision Making
- Certainty effect
- Preference reversals - Framing effects
- Heuristics and biases
Certainty Effects
- Winning $40 with probability 0.80
o EV= $32
- Winning $30 with probability 1.00
o EV = $30
- People choose option B, an immediate gain
Preference Reversal (same choices are offered in different forms)
If individuals have sufficient time and information, they make choices that maximize their
interests, which should be stable.
- Buy shoes in Store A or in Store B
Situation 1: Store A: $15 or Store B: $10, some will go to B for a significant difference
Situation 2: Store A: $150, Store B: $145, but preference is reversed in situations because
percentage wise it is not much of a difference
Framing Effects
- Decision making depends on how the problem is framed (as a loss or as a gain)
- Participants are risk-averse of gains and risk-seeking for losses
Framing:
Positive: Treatment A will save 200 lives, or treatment B is a 33% chance of saving al 600
people, 66% possibility of saving no one (people prefer Option A)
Negative: Treatment A states that 400 people will die, or treatment B is a 33% chance that no
people will die, and a 66% probability that all 600 will die. (people prefer Option B)
Heuristics and Biases
- Mental shortcuts that are easy to acquire and implement, drawback is that it may not
work
- Algorithm: step by step instructions on how to reach a goal, and they will always work if
done correctly, but may be computationally complex and not always avaiable
- Kahneman and Tversky
- Confirmation Bias
- Overconfidence
- Availability Heuristics - Representativeness Heuristics
Biases
- Confirmation Bias: failure to seek disconfirming evidence

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