chapter nine decision making
Terms
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- decision
- a choice among possibilities. involves assessment of the courses of action available and a determination of the action (or nonaction) to take.
- normative/perscriptive decision making theories
- tell us how we should or ought to make decisions, economic models are examples.
- descriptive theories of decision making
- focus on how we actually make decisions, not on how we should make them
- decision trees
-
represent the courses of action or options
under consideration, the likelihood of what we will get if we choose each course of action, and the consequences that follow each choice - alternatives
- different courses of action, options, choices, and strategies available to the decision maker and they are represented as branches of the tree
- belief
- the likelihood that a particular outcome will occur if we choose a particular alternative.
- consequences
- the benefits or losses that you receive or experience from the choice of a particular alternative and the events that follow from that choice
- outcome
- the result
- value
- net worth
- utility
- desirability of the value
- expected utility
- the utility of a particular outcome, weighted by the likelihood of that outcome’s occurring.
- expected utility model
- assumes rational behavior on the part of the decision maker in evaluating the likelihood of alternatives, assessing the consequences, assigning utilities, weighting or multiplying the utilities by the liklihoods, and then finally choosing the option with the highest expected utility.
- endowment effect
- we tend to feel that the loss of utility in giving up something in our possession is greater than the gain of utility in obtaining that possession in the first place—that somehow the object acquires added value simply by possessing it
- loss aversion principle
-
losses have a bigger impact than gains
of equal magnitude - risk averse
-
the concave shape in gains of a risk curve. people should prefer certainty when it comes to gains, but prefer uncertainty when it comes to
losses - risk seeking
-
convex shape for losses implies risk seeking. people should prefer certainty when it comes to gains, but prefer uncertainty when it comes to
losses - decision weights
-
our estimates of the likelihood of various outcomes of a
decision - experienced utility
- the reactions (in terms of their value or worth) to rewarded events when they are received
- decision utility
- the anticipation, at the time the decision is made, of the expected value or worth of a particular outcome
- satisficing
- a method that finds not necessarily the best of all possibilities, but one that is good enough to meet the desires of the decision maker
- elimination by aspects
-
strategy that successively evaluates a possible choice on a number of
attributes, eliminating the choices that do not measure up to the decision maker’s criteria for each attribute - prospect theory
-
first stage in decision making is comprehending the prospects ahead by framing the terms of the decision. framing involves simplifying and combining some quantities, and evaluating prospective gains and losses in relation to a reference point. this reference point, or anchor, is usually the current situation, before the decision is made. a novel assumption of prospect theory is that
this reference point is not fixed, but rather is frequently updated. - temporal discounting
- a tendency to devalue outcomes that occur further in the future
- support theory
- pecifies how we combine beliefs about likelihood derived from multiple sources and based on several underlying cognitive capacities, into a summary “strength of belief†for decision-making purposes.