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Lecture 19

Lecture 19.docx

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Carolyn Ensley

Lecture 19Chapter 13 ReasoningLecture OutlineDecision MakingDecision MakingAccording to utility theory people make decisions by calculating the expected value of each of their optionsExpected valueprobability of a particular outcome x utility of the outcomeFor example the expected value of a lottery ticket that gives you a 1 chance of winning 200 is 2Decision MakingMany of our decisions follow the principle of utility maximization or choosing the option with the greatest expected valueHowever many decisions do not follow this principleFor instance consider the following problem framed either in terms of lives saved or lives lostDecision MakingDecision MakingPeople tend to choose the less risky Program A if the problem is positively framed in terms of lives savedHowever they tend to choose the riskier Program B if the problem is negatively framed in terms of lives lostNote that the choices in each example are identical from the perspective of utility theoryDecision MakingAnother example of how decisions can be riskseeing or riskaverse depending on how the problem is framedMore people prefer the first option in problem 1 and more prefer the second option in problem 2Decision MakingFraming effects can also be demonstrated simply by changing the wording of the question and not the wording of the outcomesTo which parent would you award full child custody To which parent would you deny full child custodyDecision MakingAlthough most of the examples we are considering are from the laboratory setting framing effects have also been observed in the real world including in casinosDecision MakingClearly many of our decisions are not driven by utility maximization as predicted by utility theoryAn alternative view is known as reasonbased choice the idea that people make a decision only when they detect what they believe to be a persuasive reason for making that choiceDecision Making
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