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[PSYC 3260] - Final Exam Guide - Ultimate 88 pages long Study Guide!


Department
Psychology
Course Code
PSYC 3260
Professor
Norman Park
Study Guide
Final

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York
PSYC 3260
FINAL EXAM
STUDY GUIDE

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Judgement and Decision making
Lecture focuses on judgment and decision making
Seminal work by Kahneman & Tversky (K&T); see Kahneman
(2011) Thinking Fast & Slow for more detail
Lecture will review tasks in which people try to behave rationally
Kahneman & Tversky showed that people make systematic errors
on certain tasks
That is people behave irrationally
Errors can be explained in terms of the psychological processes
mediating these tasks
EXAMPLE SLIDE 3&4
Heuristic
Rule of thumb is a heuristic
Resemblance or representativeness heuristic is not unreasonable, but
it leads to predictable errors by participants
E.g., it ignores base rate information, that is, the fact that many
more people are farmers than librarians
Base rate = relative frequency of different members of a group
K&T argued that participants typically ignore base-rate information
and make judgements on the basis of representativeness
Kahneman model of judgment and decision making
Two modes or systems of thinking
System 1 operates automatically and quickly with little or no
effort and no sense of voluntary control
System 2 allocates attention to effortful mental activities
Other terms for these two systems are for system1, automatic, and
for system 2, controlled processing
Characteristics of system 1 (see Kahneman, 2011, page 105 for
further details)
o Generates impressions, feelings
o Operates automatically and quickly with little effort
o Creates a coherent pattern of activated ideas derived from
our stored memories
o Infers and invents causes and intentions
o Focuses on existing evidence and ignores absent evidence
Characteristics of system 2 (see Kahneman, 2011)
o Its operations are effortful and require attention
o It is lazy, and does not invest more effort than strictly necessary
o As a result the decisions that system 2 thinks it has chosen are
often guided by system 1
Anchoring effect heuristic
Here is an example of the anchoring effect
Anchor 1. Is the height of the tallest redwood more or less than
1,200 feet?
Anchor 2. Is the height of the tallest redwood more or less than 180
feet?
o Anchor 1 mean estimate 844 feet
o Anchor 2 mean estimate 282 feet
Why is anchoring effect observed
o Possibility 1
Participants believe the tree estimate provides useful
information
Next study examined this possibility
o Wheel of fortune study
o Wheel of fortune had numbers from 1-100, but was rigged;
stopped only at 10 or 65
o After seeing wheel of fortune stop (at 10 or 65), participants
answered the following question
o What is your best guess of the percentage of African nations in
the UN?
o Results
When wheel of fortune stopped 10 ; participants guessed
25%
When wheel of fortune stopped 65 ; participants guessed
45%
Conclusion: participants are influenced by uninformative
number; suggests system 1 may be operating
Anchor and adjustment
Anchoring and adjustment appears to require System 2 because
adjustment requires attention
Evidence in support of this hypothesis
o Participants adjust less when mental resources are depleted
(memory loaded with digits) and when
o Participants are slightly drunk
Anchoring may result from priming (System 1)
Evidence
o Participants were asked about average price of German cars
with either a high anchor or low anchor price
o A high anchor primed luxury brands (Mercedes, audi), low
anchor primed mass-market cars (Volkswagen)
Priming via System 1
Adjustment via System 2
AVAILABILITY HEURISTIC
Question.
o What do people do when they wish to estimate the
frequency of a category
o E.g., what is the probability that people who enroll in York
graduate from York U.?
o What is the probability that you will be robbed in the next
year?
People assess frequency by judging how easily it is to bring to mind
instance
o Several factors can bias these estimates
o 1. ease of retrievability
o 2. salience of examples (e.g., observing a violent crime) may
increase subjective probability estimates of crime frequency
o 3. media report crimes
Linda experiment
o Linda is 31 years old, single, outspoken, and very bright. As a
student, she was deeply concerned with issues of discrimination
and social justice, and also participated in antinuclear
demonstrations.
o Which alternative is more probable?
Linda is a bank teller
Linda is a bank teller and is active in the feminist
movement?
o Which alternative is more probable?
Linda is a bank teller
Linda is a bank teller and is active in the feminist
movement?
o How many select option
Linda is a bank teller 15%
Linda is a bank teller and is active in the feminist
movement? 85%
o Kahneman and Tversky labelled this the conjunction fallacy.
o Logically, everyone should choose option 1 because option 1
includes everyone in option 2
o Why do people make this error?
Hypothesized that Linda is representative of a stereotyped
idea of a feminist (generated by System 1), and system 2
ignored logical fallacy being committed
Prospect theory
Theory developed by Kahneman & Tversky
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Attempts to understand decision making under conditions of risk
This problem has been investigated by several disciplines
statistics, economics, sociology, political science
History
o Bernoulli 1738 attempted to explain why people are averse to
risk and why risk aversion decreases with increasing wealth
o Bernoulli proposed that the psychological response to a change
in wealth depends upon one’s initial wealth and decreases with
increasing wealth. Psychological response to a change in wealth
is called utility by economists
o as figure shows person with more wealth is less risk averse
because loss of money results in less utility loss than person
with less wealth
Most people choose sure alternative
Bernoulli proposed this is because the psychological value of money
decreases as the amount of money increases
Prospect theory--According to Bernoulli you choose the option with
the higher utility. Utility = weighted average of the utilities of the
outcomes multiplied by the probabilities (note: utilities are derived
from table)
Bernoulli
o Example: What would you rather have
Equal chances to have 1 million or 8 million
o Or
4 million with certainty
o Utility = .5 probability x 10 (utility) + .5 probability x 90 utility
o Utility = 5 + 45 = 50
o Or utility of 4 million = 60
According to Bernoulli you choose the option with the higher
utility. Utility = weighted average of the utilities of the outcomes
multiplied by the probabilities (note: utilities are derived from table)
So you choose the certain option. That is, you are risk averse
because of the diminishing subjective value of money (utility)
importance of Bernoulli
o Bernoulli’s theory is one of the foundations of economics
o It explains risk aversion in people
o Bernoulli’s theory is normative (describes how you should
behave)
o Kahneman & Tversky argued that Bernoulli is wrong in several
important respects and proposed prospect theory as a theory of
human behaviour
Key assumptions of prospect theory
o 1. Evaluation of choice is relative to a neutral reference point.
Outcomes that are better than the reference point are gains.
Outcomes that are worse than reference point are losses. Note,
unlike Bernoulli, prospect theory focuses on changes in wealth,
not wealth
o 2. Diminishing sensitivity in the evaluation of wealth (just like
Bernoulli)
o 3. Loss aversion. When directly compared to each other, people
hate losses more than they like gains
this figure has psychological value of money on the y-axis and the
dollar amount on the x-axis
note that there is a neutral reference point. To the right of the neutral
point are gains; to the left are losses
note that the S-shaped curve reflects the diminishing sensitivity for
gains and losses
note that the responses to losses of the S-shaped curve is stronger
than the responses to gains. This is loss aversion
Try this problem
o Assume you are richer by $300 than you are today. You are
offered a choice between
A. A sure gain of $100 or
B. A 50% chance to gain $200 and a 50% chance to lose
$0
o Here are the choices by participants
o Assume you are richer by $300 than you are today. You are
offered a choice between
A. A sure gain of $100 or [72%]
B. A 50% chance to gain $200 and a 50% chance to lose
$0 [28%]
o Note: most people are risk averse with gains
According to prospect theory, the subjective value of a
gain of $100 is more than the 50% of the value of a gain of
a second $100
Try this problem
o Assume you are richer by $500 than you are today. You are
offered a choice between
A. A sure loss of $100 or
B. A 50% chance to lose $200 and a 50% chance to lose $0
o Do you choose option A or option B
Here are the results from an experiment
o Assume you are richer by $500 than you are today. You are
offered a choice between
A. A sure loss of $100 or [36%]
B. A 50% chance to lose $200 and a 50% chance to lose $0
[64%]
o Note: most people are risk seeking with losses; that is, they
choose the riskier option
Note: most people are risk seeking with losses. To see why refer
back to the figure. In the cases of losses the pain of losing the
second hundred dollars is less than the pain of losing the first
hundred, so people are ready to take the risk of losing more to have
the chance to get back to no loss.
In general people are loss averse. That is, a loss hurts more than an
equivalent gain. For many people the loss hurts about twice as much
as a gain so most people want to avoid a loss.
Important implication of prospect theory. It is crucial in making a
choice whether you are framing choice in terms of gains or losses
o if it is a gain you are risk averse
o if it is a loss you are risk seeking
Prospect theory importance of framing
Problem 1. Imagine that the U.S. is preparing for the outbreak of an
unusual disease, which is expected to kill 600 people. Assume that
the exact scientific estimates of the programs are as follows:
If Program A is adopted, 200 people will be save
If Program B is adopted, there is a 1/3 probability that 600 people
will be saved and a 2/3 probability that no people will be saved
Here are the results
o If Program A is adopted, 200 people will be saved [72%]
o If Program B is adopted, there is a 1/3 probability that 600
people will be saved and a 2/3 probability that no people will be
saved [28%]
Note: most people choose the risk averse option. Why??
o The problem is ‘framed’ as follows: reference point is that 600
people will die and 2 possible options described as gains are
presented. Since it is framed as a gain, prospect theory predicts
that people will be risk averse
Problem 2.
o Same cover story but with the following options
o If Program C is adopted, 400 people will die
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