CLPS 0200 Lecture Notes - Lecture 14: Loss Aversion, Utility, Satisficing
11 Nov 2016
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Document Summary
Revisiting judgment: subjective/intuitive evaluation of likelihood, standard normative model of decision making: utility of option (x) = f(probability, value) How should we make decisions let u(x) be utility of option x. Some utilities are inherently probabilistic each outcome has some probability of occurring. if losing ticket (95%), if winning (5%) Is it worth buying? let e[u(x)] be the expected utility of option x. Expected utility theory: what should you choose for a utility function. Try different lotteries and see what people prefer. 4% chance of million vs. 5% chance of million more people chose the first even though the expected value is the same: transform monetary value into utils violations of normative theory. Prospect theory: keep the form of expected utility theory: e[u(x)] = sivi. Vi: subjective utility or value of outcome i. Both related nonlinearly to their objective correlates: subjective probability reweighting.
