Christen's Exam 1 Cards

Front 1

Question

Back 1

Answer

Front 2

Judgement

Back 2

the cognitive aspects of the decision-making process

Front 3

System 1 Thinking

Back 3

our INTUITIVE system, which is typically fast, automatic, effortless, implicit, emotional, and COMMON

Front 4

System 2 Thinking

Back 4

our REASONING system which is slower, conscious, effortful, explicit, logical, LESS COMMON

Front 5

Normative Decision Making

Back 5

perfect (ideal) decision making where we evaluate all of the information correctly to derive the best solution

Front 6

Steps in the "rational" (normative) decision making process

Back 6

(1) Accurately define the Problem; (2) Identify the criteria (the qualities needed); (3) Weight the criteria in importance (required vs desired); (4) Generate alternatives (list of people); (5) Rate each alternative (applicant) on each criterion (consequences of choosing this person/action); (6) Compute the optimal decision.

Front 7

Bounded Rationality

Back 7

decisions that are influenced by factors not directly tied to consequences are said to be bounded - most of the time our judgments are bounded to limited to some extent

Front 8

Why bounded-rationality?

Back 8

(1) we lack or ignore important information; (2) we operate under time and/or cost constraints; (3) we have a limited memory system (STM); (4) we have difficulty knowing what the optimal choice is; (5) it is easier to settle for an acceptable (satisficing) solution rather than the "best" solution

Front 9

Prescriptive Decision Making

Back 9

goal is to give us the best methods for making optimal decisions

Front 10

Descriptive Decision Making

Back 10

goal is to identify our mistakes and help us understand them

Front 11

Heuristic

Back 11

a simplified strategy for solving problems; automatic; usually give us "good" decisions, but not always the best

Front 12

Availability Heuristic

Back 12

an event that evokes emotions and is vivid, easily imagined, and specific will be more available than an event that is unemotional in nature, bland, difficult to imagine, or vague (what is safer traveling by air or by car?)

Front 13

Representativeness Heuristic

Back 13

the tendency to look for traits an individual may have that correspond with previously formed stereotypes (gender and racial stereotypes in hiring and promotion)

Front 14

Affect Heuristic

Back 14

emotional influences that are automatic and maybe out of our awareness (take place before any cognitive reasoning happens) (I don't like her for some reason...)

Front 15

Ease of recall

Back 15

individuals judge events that are more easily recalled from memory, based on vividness or recency, to be more numerous than events of equal frequency whose instances are less easily recalled (availability heuristic)

Front 16

Retrievability

Back 16

individuals are biased in their assessments of the frequency of events based on how their memory structures affect the search process (availability heuristic)

Front 17

Presumed associations

Back 17

individuals tend to overestimate the probability of two events co-occurring based on the number of similar associations they can easily recall, whether from experience of social influence (availability heuristic)

Front 18

Insensitivity to base rates

Back 18

when assessing the likelihood of events, individuals tend to ignore base rates if any other descriptive information is provided - even if it is relevant (representativeness heuristic)

Front 19

Insensitivity to sample size

Back 19

when assessing the reliability of sample information, individuals frequently fail to appreciate the role of sample size (representativeness heuristic)

Front 20

Misconceptions of chance

Back 20

individuals expect that a sequence of data generated by a random process will look "random," even when the sequence is too short for those expectations to be statistically valid (representativeness heuristic)

Front 21

Regression to the mean

Back 21

individuals tend to ignore the fact that extreme events tend to regress to the mean on subsequent trials (representativeness heuristic)

Front 22

The conjunction fallacy

Back 22

individuals falsely judge that conjunctions (two events co-occurring) are more probable than a more global set of occurrences of which the conjunction is a subset (representativeness heuristic)

Front 23

Anchoring

Back 23

individuals make estimates for values based upon an initial value (derived from past events, random assignment, or whatever information is available) and typically make insufficient adjustments from that anchor when establishing a final value (other biases)

Front 24

Conjunctive and disjunctive events bias

Back 24

Individuals exhibit a bias toward overestimating the probability of conjunctive events and underestimating the probability of disjunctive events (other biases)

Front 25

Overconfidence

Back 25

individuals tend to be overconfident of the infallibility of their judgments when answering moderately to extremely difficult questions (other biases)

Front 26

The confirmation trap

Back 26

individuals tend to seek confirmatory information for what they think is true and fail to search for nonconfirmatory evidence (other biases)

Front 27

Hindsight and the curse of knowledge

Back 27

after finding out whether or not an event occurred, individuals tend to overestimate the degree to which they would have predicted the correct outcome; furthermore, individuals fail to ignore information they possess that others do not when predicting others' behavior (other biases)

Front 28

Cognitive bias

Back 28

occurs in situations in which an individual inappropriately applies a heuristic when making a decision

Front 29

Framing

Back 29

alternative wordings of the same objective information that significantly alter the model decision, though differences between frames should have no effect on the rational decision

Front 30

Expected-Utility Theory

Back 30

suggests that each level of an outcome is associated with an expected degree of pleasure or net benefit, called utility.

Front 31

Prospect Theory

Back 31

we judge gains and losses from a reference point; we are risk averse when the problem is framed as a sure gain; we are risk seeking when faced with a sure loss; the value function for losses is steeper then the value function for gains

Front 32

Misjudging probabilities

Back 32

we tend to underestimate the likelihood of high-probability events and over-estimate the probability of low-probability events

Front 33

Certainty Effect

Back 33

the reduction in the probability of an event has more importance to us when the final outcome is certain; we prefer to eliminate all risk rather than just reducing it; we will invest a lot to be absolutely certain than less and take a chance

Front 34

Pseudocertainty Effect

Back 34

we are more likely to favor options that offer apparent certainty than those that only reduce uncertainty; appearance of certainty is preferred over the POSSIBILITY of reduced certainty

Front 35

Transactional Utility

Back 35

we judge the quality of the deal you are getting compared to what the item should cost

Front 36

Acquisition Utility

Back 36

the value you place on a commodity

Front 37

Price-Quality Heuristic

Back 37

link price and quality but do not know how to judge quality (increased dollar amount does not mean increased quality); we use price as a substitute for quality knowledge

Front 38

Endowment Effect

Back 38

we demand a higher selling price for a product than we would be willing to pay for the same product because it is in our possession; the seller's price includes intrinsic worth and attachment to the item

Front 39

Mental Accounting

Back 39

mental accounts that are used to organize, evaluate, and keep track of a variety of financial activities, such as money for vacation, a renovation, this month's budget, etc.; we have different rules for different mental accounts

Front 40

Bonus

Back 40

creates the image of surplus cash

Front 41

Rebate

Back 41

conveys the image of money that simply returns you to the appropriate status quo

Front 42

Omission Bias

Back 42

when contemplating risky choices, not acting is seen as less risky than acting (do no harm); actions generate more regret in the short-term while not acting will generate more regret in the long-term

Front 43

Joint vs Separate Preference Reversals

Back 43

we place a higher value on one option over another when evaluated separately; we reverse our preferences when we consider the options at the same time; why - conflict with system 1 & 2 thinking, the emotional is stronger in the separate evaluations, the rational is stronger in the comparison conditions

Front 44

Evaluability Hypothesis

Back 44

hard to evaluate attributes will have less impact in separate evaluations than in joint evaluations

Front 45

Hyperbolic discounting

Back 45

the present is more vivid to us than the future; we view all gains and losses in the future as worth less than present gains and losses; ie. retirement investments (future loss) vs. credit cards (current loss)

Front 46

Motivation and Affect

Back 46

when what we want to do conflicts with what we should do

Front 47

Positive Illusions

Back 47

we have an overly positive view of ourselves, the world, and the future; positive illusions enhance self-esteem and increase persistence; it is more difficult to have optimistic illusions when we are confronted with the hard facts; we don't just think positive about ourselves, but also about the groups in which we belong

Front 48

Unrealistic Positive View of Self

Back 48

we see ourselves as better than others; common unrealistic traits include: honesty, cooperation rationality, driving skills, health, intelligence, and morals; we are highly accurate in predicting the behavior of others

Front 49

Illusion of Control

Back 49

the belief that we can control uncontrollable events and that our actions can guarantee a certain outcome; the origins of superstitious behaviors

Front 50

Self-serving attributions

Back 50

we are more likely to accept credit for collective successes and to accept too little responsibility for failures; allows us to protect our self-image

Front 51

Positive Illusions in Groups

Back 51

desirable characteristics of an ingroup are internal; undesirable characteristics are caused by external factors

Front 52

Self-Serving Reasoning

Back 52

we first determine the best outcome based on self-interest (decide what you want) and then seek evidence to support it based on fairness (determine reasons why we should be given "it") easier to argue for collective reasons (not just me that wants...but everyone); we tend to be more self-serving when we can attribute the benefits to our group rather than ourselves

Front 53

Affective influences on the endowment effect

Back 53

the value people place on a commodity is far greater if they own the commodity than if they do now; disgust triggers the desire to expel, suppressing prices for people who do and do not own the commodity; sadness triggers the goal to change one's circumstances, increasing the willingness to pay to buy and decreasing the price demanded to sell

Front 54

depression and decisions

Back 54

linked to greater judgment accuracy; depression = more realistic view of self than those not depressed

Front 55

sadness and decisions

Back 55

triggers more deliberative thought processes; sad people are more impacted by anchors (original experiences)

Front 56

good moods and decisions

Back 56

people in good moods are more optimistic

Front 57

fear and anxiety and decisions

Back 57

fear and anxiety increase risk aversion

Front 58

happy people and decisions

Back 58

happy individuals may be less motivated to expand cognitive effort and more likely to rely on heuristic processing (System 1 thinking)

Front 59

Pessimism and decisions

Back 59

pessimism = better ability to make good decisions

Front 60

sunk cost

Back 60

the time and money already invested in something; as sunk costs increase our level of commitment increases

Front 61

sunk costs and decisions

Back 61

from an economic perspective, we should ignore what we have already invested and only consider future gains and losses; sunk costs are irrelevant to future decisions; they do not rationally play a part in future decisions

Front 62

nonrational escalation

Back 62

the degree to which an individual escalates commitment to a previously selected course of action to a point beyond that whcih a rational model of decision making would prescribe

Front 63

Self-justification

Back 63

once an individual makes an initial decision, negative feedback is dissonant with the initial decision; escalating the commitment reduces this dissonance; people more likely to reinvest if their initial investment had been unsuccessful because of self-justification

Front 64

escalation and groups

Back 64

groups are less likely to escalate commitment, but if they do, they do so to a greater extent and individuals not in a group; easier to walk away from bad decisions if they were made in a group; groupthink may cause escalation (leader won't back down, etc.)

Front 65

escalation and external factors

Back 65

we are more likely to escalate when the cause is unrelated to the initial decision; if unknown reason is why loss occurred then we are more likely to stick with our initial behavior; try to justify with external factors

Front 66

High and low responsibility groups and escalation

Back 66

high responsibility individual = personal decision to invest initially and initial investment was unsuccessful; low responsibility individual = another individual made initial investment which was unsuccessful; high responsibility individual were more likely to reinvest than low responsibility individual

Front 67

personal loss and escalation

Back 67

increased likelihood to continue with initial decision to invest and will reinvest; if someone else made the bad decision we are more likely to change the behavior

Front 68

competitive escalation

Back 68

added competition with the other party - the desire to "win" - serves as added motivation to escalate commitment

Front 69

Reasons why escalation occurs

Back 69

(1) Perceptual biases, (2) judgmental biases, (3) impression managment, (4) competitive irrationality

Front 70

Perceptual Biases

Back 70

you notice information that supports your initial decision and ignore information that goes against it; we don't look for negative information; downplay the negative and increase the positive

Front 71

Judgmental Biases

Back 71

any loss will distort our judgment toward continuing the initial decision because according to prospect theory, we are more willing to take risks when facing a sure loss; losses are more aversive/painful than the joy that we receive from losing a "gain"

Front 72

Impression Management

Back 72

we don't like others to know we have made a mistake and we want to appear consistent; instead of admitting that you've made a mistake you constantly reinvest to put off having to face the loss; since managers are rewarded based on results they are motivated to hide or delay bad outcomes by escalating

Front 73

Competitive Irrationality

Back 73

two parties engage in an activity that is clearly irrational in terms of the expected outcomes to both sides (the dollar auction when the value goes above a dollar); if I do this...then you will do this...(irrational escalation); rational decision is for both parties not to "play"

Front 74

Prisoner delima

Back 74

one convict rats out the other convict and gets off (wins) the other loses; if the one does not rat out the other then both lose the same amount (both do time)

Front 75

fairness

Back 75

fairness is judged by how the situation is framed; a wage cut is perceived as unfair, while a nominal gain that does not even cover inflation is more acceptable

Front 76

Norms of equity

Back 76

lead us to reject offers that are unequal and lead us to accept equal split offers prematurely

Front 77

Ultimatum

Back 77

rationally we should except any offer that is higher than zero, but we don't (the ultimatum game)

Front 78

Concern for the outcomes of others

Back 78

people are concerned with how their outcomes compare to the outcomes of others; the outcomes of others act as a key reference point in interpersonal decisions

Front 79

Joint-versus-separate preference reversals

Back 79

individuals care far more about social comparisons ($400:$400 = equity within) when rating specific outcomes and more about absolute outcomes ($500:$700 = competitive parody) in actual choice behavior

Front 80

Procedural Justice

Back 80

individuals value the procedures used to create justice, as well as the justice of the outcomes obtained ($60,000/yr & high procedural justice versus $75,000/yr and low procedural justice); we care more about procedural justice when rating a specific outcome and more about absolute outcomes in a choice response; self-interest is always more important than procedural justice (greed is good)

Front 81

A friend tells you that his mutual fund has beaten the benchmark averages five years in a row. Should you buy in?

Back 81

past stock performance is not predictive of future performance

Front 82

Overconfidence

Back 82

leads people to believe in their own abilities (more active investing); individual investors buy and sell too often; men buy and sell more often than women; more frequent buying and selling results in higher fees for commissions and real time trades

Front 83

Optimism

Back 83

investors make overly confident decisions and maintain overly optimistic views of future success (because I can imagine it it is more likely to happen)

Front 84

Denying randomness

Back 84

we often believe that random events are not really random; we believe that a hot fund has done well because of the fund managers talent, not luck; we ignore regression to the mean (dogs of the dow = low performers will increase/regress to the mean and we buy when low and sell when they reach the mean)

Front 85

Anchoring and Status Quo

Back 85

we stick with default investment allocations; investments involve immediate expenditures (losses) for a future gain

Front 86

Procrastination

Back 86

Omission bias (we don't invest at all) and discounting (discount future gains relative to losses NOW)

Front 87

Prospect Theory

Back 87

we are risk seeking with losers and risk averse with winners; as a result we hold on to losers too long and sell winners too soon