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Decision Making I

Rationality in Decision Making

QuestionAnswer
What are some of the ideas regarding decision making that stem from economics? Edwards (1954) says that people are intuitive statisticians. We are rational decision makers that make optimal choices to maximize value.
What is the difference between expected value theory and expected utility theory? Value theory has to do with monetary value while utility theory has to do with psychological value.
How do we test whether we're rational? Decisions correspond to statistical equations, consistency, and transitivity.
Describe the certainty effect Bets and probabilities. Expected value calculations show that first choice in all situations is always higher. When people have two options and one guarantees a gain, that option will almost always be chosen.
Lichtenstein and Slovic (1973) study on differing bets demonstrated preference reversal among participants. What does this mean? A tendency to prefer one alternative when a set of alternatives is presented simultaneously and evaluated jointly but to prefer a different one when the same alternatives are presented in isolation and evaluated separately.
Tversky and Kahneman's (1981) study about the unusual Asian virus successfully demonstrated the framing effect. What is the framing effect? The phenomenon in which people react differently to a particular choice depending on whether it is presented as a loss or as a gain.
Another example of the framing effect can be seen in the custody battle example. Why does the situation end the way it does? Parent B gets sole custody based on the wording of the problem.
What is the attractiveness effect in terms of decision making? We will choose the most appealing between multiple options. Can be heavily influenced by the choices available.
What are sunk costs? Retrospective cost that has already been incurred and cannot be recovered (boring movie example).
Created by: cassidylm34
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