Error And Bias Exam 1 Week 1

Front 1

Judgment

Back 1

an evaluation or estimate of something

when we reason about what to believe

Front 2

Decision

Back 2

an intention to pursue a particular course of action

when we reason about what to do

Front 3

Classic Decision Theory

Back 3

analyzes risky decision-making using ideas of probability and logic

Formal and context-independent

Front 4

According to Classic Decision Theory, risky decisions can be broken down into 2 things

Back 4

Utility: how much you value and outcome

Probability: How likely it is to occur

Front 5

Expected Value equation

Back 5

value x probability

Front 6

Expected Value Rule

Back 6

Choose the option that maximizes expected value

Front 7

Requirements of expected value rule

Back 7

Preferences must be coherent (stable and consistent)

* Must satisfy certain axioms: ordering of alternatives
dominance
cancellation
transitivity
continuity
invariance

Front 8

Ordering of alternatives

Back 8

any two alternatives can be compared so that one is preferred over the other, or a person is indifferent to them

Front 9

Dominance

Back 9

perfectly rational decision makers should never choose a dominated strategy, even if the strategy is only weakly dominated

Front 10

Cancellation

Back 10

a choice between two alternatives should depend only on those outcomes that differ,, not on outcomes that are the same for both alternatives

common factors should cancel out

Front 11

Transitivity

Back 11

if a>b and b>c, then a>c

Front 12

Continuity

Back 12

a decision maker should always prefer a gamble between the best and worst outcome to a sure intermediate outcome if the odds of the best outcome are good enough

Front 13

Invariance

Back 13

a decision maker should not be affected by the way alternatives are presented

Front 14

St. Petersberg Paradox

Back 14

Nicolas Bernoulli

nobody would pay very much to play a game with infinite expected value: continuous coin toss

Front 15

Diminishing Marginal Utility

Back 15

utility decreases as consumption increases

Daniel Bernnoulli

Front 16

Major flaw of Bernoulli's model of utility

Back 16

Reference independent:
it assumes (implicitly) that the EU of a choice is evaluated against total state of wealth
"the carriers of utility are states of wealth"
human perceptual system is reference dependent

Front 17

Prospect Theory

Back 17

Kahneman and Tversky

replaced "utility" with "value"

Reference dependent: predicts that shifts from a reference point will lead to different choices
changes in states, rather than absolute wealth, are the carriers of utility

Front 18

Value Function
(Prospect Theory)

Back 18

Concave for gains: implies risk aversion
Convex for losses: implies risk seeking

Front 19

Loss Aversion

Back 19

losses "loom larger" than gains

Front 20

Decision weighting function
(Prospect Theory)

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psychological impact of that probability on a decision

overweighted for low probabilities, underweighted for high probabilities

Certainty effect: people care about eliminating risk more than they care about reducing it

Front 21

Expected Utility Theory

Back 21

John von Neumann and Oskar Morgenstern

proposed as a normative theory, not a descriptive theory: shows how people WOULD behave if they followed certain requirements of rational decision making

Front 22

Intransitivity

Back 22

a decision maker with intransitive preferences can be used as a "money pump"

Amos Tversky proved the existence of intransitivities with a gambling experiment where students chose between high probability and high outcome

Front 23

Preference reversals

Back 23

When people are asked to choose between two bets, they pay particular attention to the probability of winning, but when they are asked to set a price for how valuable the bet is, they look at how large the potential payoffs are

Front 24

Preference reversals

Back 24

When people are asked to choose between two bets, they pay particular attention to the probability of winning, but when they are asked to set a price for how valuable the bet is, they look at how large the potential payoffs are

Front 25

Satisficing

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Nobel Laureate Herbert Simon
rather than optimize, people "satisfice" when making decisions

to satisfice is to choose a path that satisfies your most important needs, even though the choice may not be ideal or optimal

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Endowment Effect

Back 26

a result of loss aversion

the value of a good increases when it becomes part of a person's endowment

people require much more money for something than they would pay to own the same item

Front 27

Certainty Effect

Back 27

a reduction of the probability of an outcome by a constanct factor has more impact when the outcome was initially certain than when it was merely probable

Russian Roulette: people pay more to remove the only bullet than one of five

Front 28

Pseudocertainty

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Vaccine experiment: people are attracted to certainty

A dry cleaner may offer to clean one shirt free with each order of three, instead of calling it 25% off because free is more appealing than a discounted service

Front 29

Regret Theory

Back 29

counterfactual reasoning is the comparison of hypothetical outcomes; forms the basis of regret theory

risk aversion, but adds regret

has been offered as an alternative to prospect theory, but anticipation of regret may not conflict w/ prospect theory

Front 30

Multi-attribute choice

Back 30

concerns how, rather than how well, people make decisions

people use compensatory strategies to compare alternatives: either linear model or additive difference model (only differences are weighted) or ideal point model (how far from ideal?)

Front 31

Noncompensatory strategies

Back 31

used with complex choices of many alternatives

conjunctive rule
disjunctive rule
lexicographic strategy
elimination-by-aspects

Front 32

Conjuctive rule

Back 32

Noncompensatory stragegy: eliminate any alternatives that fall outside certain predefined boundaries

example of satisficing

Front 33

Disjunctive rule

Back 33

Noncompensatory strategy: each alternative is evaluated in terms of its best attribute, regardless of how poor other aspects of the alternative may be

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Lexicographic strategy

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Noncompensatory strategy:
list the most important dimensions and choose the one(s) that scored the highest until there's only one left

Front 35

Elimination-by-Aspects (EBA)

Back 35

Noncompensatory strategy:
probabilitistic variation of the lexicographic strategy

each dimension of comparison is selected with a probability proportional to its importance