Decision Making and Expected Utility Theory

10 Questions

What is the primary goal of a decision maker in expected utility theory?

To maximize expected utility

According to prospect theory, people are more likely to take risks when faced with potential gains.

False

What is the term for the degree of which a given consequence helps an individual achieve their goals?

Utility

In expected utility theory, __________ are all factors outside of the decision maker's control.

States

Match the following terms with their definitions:

Acts = Different actions a decision maker can take Consequences = Different possible results of an act States = All factors outside of the decision maker's control

What is the term for the tendency of people to over-value things they already own in comparison to what they don't own?

Endowment effect

According to the affect infusion model, positive emotions increase with pleasant information, leading to more risk-averse behavior.

False

What is the term for the questionnaire that measures how likely people are to take risks in different domains?

DOSPERT

The __________ hypothesis suggests that people rely on emotional signals generated from their bodies for complex decisions.

Somatic marker

In the ultimatum game, receivers always accept fair offers.

True

Study Notes

Decision Making

Decision making involves cognitive processes to choose an action from a set of possible alternatives
There are two types of decision making: preference-based and perceptual decision making

Expected Utility Theory

An economic theory that describes how people make decisions to maximize their expected utility
Decisions are analyzed in terms of acts, consequences, and states
Acts: different actions a decision maker can take
Consequences: different possible results of an act, which can be pleasant, unpleasant, or neutral
States: all factors outside of the decision maker's control
Utility: the degree to which a given consequence helps an individual achieve their goals
Consequences that move us closer to our goals have positive utility
Utility is subjective and can change over time
Expected utility is the product of the utility of a consequence and its probability

Risk aversion: people prefer less risk
Loss aversion: people are more likely to want to avoid losses than gain wins
Negative utility is stronger than positive utility
Prospect theory explains risk aversion through the utility function
Utility function: how the objective numerical amount of a product relates to subjective utility
Decreasing marginal utility: the impact of an additional item decreases as the quantity increases
Decreasing marginal disutility: the more losses hurt less than the first

Biases and Heuristics

Framing effect: people make different decisions depending on whether the scenario emphasizes potential gains or losses
Endowment effect: people over-value things they already own in comparison to what they don't own
Default option bias: people tend to choose the default option even if it's not the best option
Affect heuristic: people's tendency to make decisions based on their emotional reactions to different potential consequences
Somatic marker hypothesis: people rely on emotional signals generated from their bodies for complex decisions

Emotion and Decision Making

Ultimatum game: receivers tend to accept fair offers but not "unfair" offers, and are more likely to accept "unfair" offers when they believe a computer is making them
Anger can change the goal from making the most amount of money to getting revenge
Affect infusion model: emotional information is incorporated when appreciating consequences, acts, and consequences
Mood maintenance hypothesis: people in happy moods want to maintain their mood, while unhappy people want to try to feel good