Decision-Making Theories and Experiments

Study Notes

Satisficing: Instead of striving for the absolute best solution, individuals often seek a good enough option.
Prospect Theory: Individuals are more likely to take risks when facing potential losses compared to gains, often demonstrating irrational behaviors when assessing probabilities.
Somatic Marker Hypothesis: Decisions are influenced by emotional responses (somatic markers), particularly in risky or uncertain situations. These markers serve as "gut feelings" guiding individuals towards avoiding negative outcomes.
Delay Discounting: Individuals value future rewards less than immediate ones, leading to impulsivity and potential addiction.

Iowa Gambling Task (IGT): Assesses decision-making in ambiguous situations by having participants choose cards from different decks with hidden rewards and penalties. Performance is often impaired in individuals with prefrontal cortex damage or substance abuse problems.
Balloon Analogue Risk Task (BART): Measures risk-taking by requiring participants to balance the potential for larger rewards with the increasing risk of loss. Strong correlations exist between BART performance and real-world risky behaviors.
Delay Discounting Studies: People with addictions, such as heroin or alcohol, often prefer smaller, immediate rewards over larger, delayed rewards.

Riskless Decision: Decisions with known outcomes, such as investing in a term deposit.
Risky Decision: Decisions with uncertain outcomes. These can be further categorized into ambiguous situations (unknown likelihood) like betting on sports, and calculable situations (known likelihood) like playing roulette.
Economic Rationality: Assumes individuals are perfectly rational and always seek to maximize their utility with complete information.
Bounded Rationality: Acknowledges limitations and biases in human rationality, recognizing cognitive constraints and limited information access.
Impulsive vs. Reflective Systems:
- Reflective System: Linked to higher-order thinking, associated with the prefrontal cortex, and characterized by effortful, controlled processes.
- Impulsive System: Driven by immediate emotional responses, often associated with the amygdala, and can override reflective thinking, leading to poor decisions.

Real-World Decision Making: Theories are broadly applied to real-life scenarios, including financial choices, gambling, addiction, and risky behaviors.
Emotional Influence: Emotions can bias decisions, particularly in situations involving risk or reward. For example, individuals may prioritize immediate gratification over long-term consequences, as demonstrated in addiction.

Economic Rationality: Assumes perfect rationality, where individuals maximize outcomes based on complete information.
Bounded Rationality: Recognizes that humans are rational but limited by cognitive constraints and available information.
Prospect Theory: Individuals are risk-averse for gains and risk-seeking for losses, displaying irrational tendencies when evaluating probabilities.