Decision Making and Expected Utility Theory
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Questions and Answers

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

  • To minimize losses
  • To avoid risks
  • To make fair decisions
  • To maximize expected utility (correct)
  • 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.

    <p>States</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>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</p> Signup and view all the answers

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

    <p>Endowment effect</p> Signup and view all the answers

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

    <p>False</p> Signup and view all the answers

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

    <p>DOSPERT</p> Signup and view all the answers

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

    <p>Somatic marker</p> Signup and view all the answers

    In the ultimatum game, receivers always accept fair offers.

    <p>True</p> Signup and view all the answers

    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

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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.

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