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Questions and Answers
What is the primary goal of a decision maker in expected utility theory?
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.
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Match the following terms with their definitions:
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What is the term for the tendency of people to over-value things they already own in comparison to what they don't own?
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According to the affect infusion model, positive emotions increase with pleasant information, leading to more risk-averse behavior.
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What is the term for the questionnaire that measures how likely people are to take risks in different domains?
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The __________ hypothesis suggests that people rely on emotional signals generated from their bodies for complex decisions.
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In the ultimatum game, receivers always accept fair offers.
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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
Prospect Theory and Related Phenomena
- 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
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Description
This quiz covers the cognitive processes involved in decision making, including preference-based and perceptual decision making, as well as the concept of expected utility theory in economics.
