Podcast
Questions and Answers
What major emotional factor does prospect theory fail to account for in decision-making?
What major emotional factor does prospect theory fail to account for in decision-making?
- Confidence
- Anticipation
- Disappointment (correct)
- Joy
In the context of choosing between a gamble and a certain amount, what factor increases the anticipated pain of regret?
In the context of choosing between a gamble and a certain amount, what factor increases the anticipated pain of regret?
- The likelihood of winning the gamble
- The certainty of winning a smaller amount (correct)
- The size of the gamble
- The total number of options available
How do prospect theory and utility theory evaluate options in decision-making?
How do prospect theory and utility theory evaluate options in decision-making?
- Independently and separately from one another (correct)
- By combining all possible outcomes into a single evaluation
- Through the context of previous experiences only
- Based on emotional response and possible regret
What does prospect theory imply about the impact of winning nothing when a large prize is highly anticipated?
What does prospect theory imply about the impact of winning nothing when a large prize is highly anticipated?
What is a flaw identified in both prospect theory and utility theory?
What is a flaw identified in both prospect theory and utility theory?
What do decision-makers primarily assess outcomes relative to?
What do decision-makers primarily assess outcomes relative to?
Which statement about loss aversion is correct?
Which statement about loss aversion is correct?
How does diminishing sensitivity affect subjective value?
How does diminishing sensitivity affect subjective value?
In the context of the Asian disease problem, what do individuals prefer when decisions are framed as gains?
In the context of the Asian disease problem, what do individuals prefer when decisions are framed as gains?
What results from a negative framing effect in decision-making?
What results from a negative framing effect in decision-making?
Which gambling scenario illustrates blindness of prospect theory?
Which gambling scenario illustrates blindness of prospect theory?
Why might winning nothing be assigned a value of zero in certain gambles?
Why might winning nothing be assigned a value of zero in certain gambles?
What creates risk-averse choices in mixed gambles?
What creates risk-averse choices in mixed gambles?
How does the value function in prospect theory differ from the traditional utility function?
How does the value function in prospect theory differ from the traditional utility function?
What characteristic of the value function reflects loss aversion?
What characteristic of the value function reflects loss aversion?
In problem 1, why do most people choose to receive $900 for sure instead of gambling for a 90% chance to win $1,000?
In problem 1, why do most people choose to receive $900 for sure instead of gambling for a 90% chance to win $1,000?
What was the outcome of problem 4 compared to problem 3 in terms of decision preferences?
What was the outcome of problem 4 compared to problem 3 in terms of decision preferences?
What issue arises from Bernoulli’s theory when comparing decision-making in the problems described?
What issue arises from Bernoulli’s theory when comparing decision-making in the problems described?
What does the convex shape of the value function for losses indicate about individuals' behaviors?
What does the convex shape of the value function for losses indicate about individuals' behaviors?
Which of the following statements is true regarding the reference point in the value function?
Which of the following statements is true regarding the reference point in the value function?
Why did a large majority prefer the sure option in problem 3?
Why did a large majority prefer the sure option in problem 3?
What cognitive process is likely to occur when judging the probability of an unlikely event?
What cognitive process is likely to occur when judging the probability of an unlikely event?
In the context of estimating probabilities, when a target event is likely, what alternative usually receives more focus?
In the context of estimating probabilities, when a target event is likely, what alternative usually receives more focus?
What is the likely outcome of being in a confirmatory mode when estimating the frequency of problems?
What is the likely outcome of being in a confirmatory mode when estimating the frequency of problems?
In prospect theory, how does the decision weight for a 90% chance compare to the utility theory equivalent?
In prospect theory, how does the decision weight for a 90% chance compare to the utility theory equivalent?
What aspect of optimism is highlighted in the planning fallacy?
What aspect of optimism is highlighted in the planning fallacy?
What may lead someone to overestimate the probability of a rare event?
What may lead someone to overestimate the probability of a rare event?
What generally happens to decision weights when probabilities vary in prospect theory?
What generally happens to decision weights when probabilities vary in prospect theory?
How do decision weights for probabilities like 90% and 10% differ in prospect theory?
How do decision weights for probabilities like 90% and 10% differ in prospect theory?
How does the vividness of an outcome affect the sensitivity to probability in decision-making?
How does the vividness of an outcome affect the sensitivity to probability in decision-making?
What psychological phenomenon is demonstrated by the decision-making regarding Urn A and Urn B?
What psychological phenomenon is demonstrated by the decision-making regarding Urn A and Urn B?
Which effect describes the tendency to overweight certain probabilities due to vivid imagery?
Which effect describes the tendency to overweight certain probabilities due to vivid imagery?
What is the primary reason that vivid but irrelevant details disrupt monetary decision-making?
What is the primary reason that vivid but irrelevant details disrupt monetary decision-making?
In the context of risk psychology, how does cognitive ease influence the perception of event outcomes?
In the context of risk psychology, how does cognitive ease influence the perception of event outcomes?
What would likely happen when individuals are exposed to a detailed representation of a potential loss?
What would likely happen when individuals are exposed to a detailed representation of a potential loss?
What conclusion can be drawn from students' choices regarding the marbles in Urn A and Urn B?
What conclusion can be drawn from students' choices regarding the marbles in Urn A and Urn B?
What aspect of decision-making does 'denominator neglect' primarily affect?
What aspect of decision-making does 'denominator neglect' primarily affect?
What psychological mechanism leads people to overweight unlikely outcomes?
What psychological mechanism leads people to overweight unlikely outcomes?
How did Kahneman's behavior change when he encountered a bus, despite his knowledge of the low risk?
How did Kahneman's behavior change when he encountered a bus, despite his knowledge of the low risk?
What effect does frequent media coverage of rare events have on public perception?
What effect does frequent media coverage of rare events have on public perception?
Which aspect of decision-making is illustrated by the difference between assessing a probability and placing a bet?
Which aspect of decision-making is illustrated by the difference between assessing a probability and placing a bet?
What primarily causes the overestimation of the probabilities of unlikely events?
What primarily causes the overestimation of the probabilities of unlikely events?
What is the implication of System 1 in decision-making regarding low-probability events?
What is the implication of System 1 in decision-making regarding low-probability events?
How do specific descriptions impact decision-making according to the principles discussed?
How do specific descriptions impact decision-making according to the principles discussed?
What is a potential consequence of Kahneman's observation regarding risk perception in everyday choices?
What is a potential consequence of Kahneman's observation regarding risk perception in everyday choices?
What effect does denominator neglect have on the perception of low probability events?
What effect does denominator neglect have on the perception of low probability events?
Which statement best illustrates how format influences risk perception?
Which statement best illustrates how format influences risk perception?
What phenomenon explains why rare events are often overestimated in decision-making?
What phenomenon explains why rare events are often overestimated in decision-making?
How does System 1 cognition differ from System 2 in risk assessment?
How does System 1 cognition differ from System 2 in risk assessment?
Why might it be problematic to assess a vaccine's risk using the statement '0.001% risk of permanent disability'?
Why might it be problematic to assess a vaccine's risk using the statement '0.001% risk of permanent disability'?
What is the primary effect of framing a decision in terms of vivid individual outcomes?
What is the primary effect of framing a decision in terms of vivid individual outcomes?
What is often a common behavior observed in decision-making from experience?
What is often a common behavior observed in decision-making from experience?
What is experienced utility primarily concerned with?
What is experienced utility primarily concerned with?
What is the primary function that describes how people distort probabilities according to prospect theory?
What is the primary function that describes how people distort probabilities according to prospect theory?
How do people react to changes in probability near the boundaries of 0 and 1, according to prospect theory?
How do people react to changes in probability near the boundaries of 0 and 1, according to prospect theory?
What does the certainty effect imply about outcomes that are almost certain?
What does the certainty effect imply about outcomes that are almost certain?
Which principle states that choices should not depend on how a situation is described?
Which principle states that choices should not depend on how a situation is described?
Why can certainty about an outcome be seen as an illusion in decision-making?
Why can certainty about an outcome be seen as an illusion in decision-making?
What effect does changing a probability from a 0 to 0.1 have compared to changing it from 0.3 to 0.4?
What effect does changing a probability from a 0 to 0.1 have compared to changing it from 0.3 to 0.4?
Which statement best describes the framing effect as it relates to decision-making?
Which statement best describes the framing effect as it relates to decision-making?
What is the potential negative outcome of relying on the certainty effect in decision-making?
What is the potential negative outcome of relying on the certainty effect in decision-making?
What defines the difference between predicted utility and experienced utility?
What defines the difference between predicted utility and experienced utility?
How might decision utility lead to poor decision-making?
How might decision utility lead to poor decision-making?
What role do endings and peak experiences play in our memory of utility?
What role do endings and peak experiences play in our memory of utility?
What does prospect theory primarily focus on?
What does prospect theory primarily focus on?
What is a key assumption of expected-utility theory that prospect theory challenges?
What is a key assumption of expected-utility theory that prospect theory challenges?
How do subjective probabilities impact decision-making according to prospect theory?
How do subjective probabilities impact decision-making according to prospect theory?
Inconsistency in choices made by the same person indicates what about decision utility?
Inconsistency in choices made by the same person indicates what about decision utility?
What does the concept of seeking variety illustrate in terms of experienced utility?
What does the concept of seeking variety illustrate in terms of experienced utility?
What statistical test is appropriate when using a random groups design with two levels of a single independent variable?
What statistical test is appropriate when using a random groups design with two levels of a single independent variable?
In a matched or related measures design, how is statistical variance controlled?
In a matched or related measures design, how is statistical variance controlled?
What defines the independent variable in an experiment comparing the learning speed of the same subjects under alcohol and no-alcohol conditions?
What defines the independent variable in an experiment comparing the learning speed of the same subjects under alcohol and no-alcohol conditions?
Which of the following is true about a random groups design with more than two levels?
Which of the following is true about a random groups design with more than two levels?
When two independent groups participate in an experiment, what is the nature of the independent variable?
When two independent groups participate in an experiment, what is the nature of the independent variable?
What is the main advantage of using a matched or related measures design?
What is the main advantage of using a matched or related measures design?
What scenario exemplifies a matched pairs design?
What scenario exemplifies a matched pairs design?
An example of a dependent variable measured on an interval scale would be:
An example of a dependent variable measured on an interval scale would be:
What is the appropriate statistical test for comparing the performance of students in four different educational programs?
What is the appropriate statistical test for comparing the performance of students in four different educational programs?
In a repeated measures design with more than two levels, how are subjects typically tested?
In a repeated measures design with more than two levels, how are subjects typically tested?
What is the total number of different conditions in a two-factor experiment with 4 levels of factor A and 3 levels of factor B?
What is the total number of different conditions in a two-factor experiment with 4 levels of factor A and 3 levels of factor B?
Which design involves subjects being tested in only one condition regarding both retention interval and type of material?
Which design involves subjects being tested in only one condition regarding both retention interval and type of material?
What characteristic is common in a mixed design in experimental research?
What characteristic is common in a mixed design in experimental research?
What type of analysis is used when measuring the effect of both imagery and frequency in a completely repeated measures design?
What type of analysis is used when measuring the effect of both imagery and frequency in a completely repeated measures design?
What is a key feature of independently varying factors in a two-factor experiment?
What is a key feature of independently varying factors in a two-factor experiment?
In a completely repeated measures design with imagery and frequency, how many total conditions are there with 2 imagery levels and 3 frequency levels?
In a completely repeated measures design with imagery and frequency, how many total conditions are there with 2 imagery levels and 3 frequency levels?
What defines an independent variable in an experiment?
What defines an independent variable in an experiment?
What is a control variable?
What is a control variable?
How many levels are required for an independent variable in an experiment?
How many levels are required for an independent variable in an experiment?
What differentiates a randomized design from a matched groups design?
What differentiates a randomized design from a matched groups design?
What type of experimental design involves the same subjects participating in all conditions?
What type of experimental design involves the same subjects participating in all conditions?
Why are matched designs preferred to randomized designs?
Why are matched designs preferred to randomized designs?
In the context of experimental designs, what is meant by 'levels'?
In the context of experimental designs, what is meant by 'levels'?
What is a characteristic of a mixed design in experimental research?
What is a characteristic of a mixed design in experimental research?
What does the term 'interaction' refer to in two-factor experiments?
What does the term 'interaction' refer to in two-factor experiments?
Which of the following is NOT a requirement for establishing a causal relationship?
Which of the following is NOT a requirement for establishing a causal relationship?
What is an INUS condition in the context of causal relationships?
What is an INUS condition in the context of causal relationships?
In an experiment, what does the term 'counterfactual' refer to?
In an experiment, what does the term 'counterfactual' refer to?
How does context dependency affect causal relationships in experiments?
How does context dependency affect causal relationships in experiments?
What characterizes the difference between causes and effects in research?
What characterizes the difference between causes and effects in research?
In terms of taste preference, how does salt interact with food types based on the example provided?
In terms of taste preference, how does salt interact with food types based on the example provided?
Which statement best illustrates a necessary condition in a causal relationship?
Which statement best illustrates a necessary condition in a causal relationship?
What did Kahneman and Tversky initially seek to understand about human intuition?
What did Kahneman and Tversky initially seek to understand about human intuition?
What is the primary focus when studying heuristic errors?
What is the primary focus when studying heuristic errors?
In the context of decision-making, what is a common misconception people have about their intuition?
In the context of decision-making, what is a common misconception people have about their intuition?
What impact does intuitive decision-making have on assumptions made by individuals?
What impact does intuitive decision-making have on assumptions made by individuals?
Which of the following best describes the terms 'molar' and 'molecular' as used in the context of understanding phenomena?
Which of the following best describes the terms 'molar' and 'molecular' as used in the context of understanding phenomena?
What conclusion can be made about the relationship between intuition and statistical reasoning?
What conclusion can be made about the relationship between intuition and statistical reasoning?
What aspect of decision-making are heuristics primarily associated with?
What aspect of decision-making are heuristics primarily associated with?
How did Kahneman's approach evolve through his collaboration with Tversky?
How did Kahneman's approach evolve through his collaboration with Tversky?
What is the primary method through which experiments establish causal relationships?
What is the primary method through which experiments establish causal relationships?
Which of the following accurately describes a challenge faced by experiments regarding causal explanations?
Which of the following accurately describes a challenge faced by experiments regarding causal explanations?
What type of variables can be effectively manipulated in an experiment?
What type of variables can be effectively manipulated in an experiment?
Which term best describes the process of outlining the consequences of a manipulated variable in an experiment?
Which term best describes the process of outlining the consequences of a manipulated variable in an experiment?
What is a significant limitation of experiments when it comes to non-manipulable causes?
What is a significant limitation of experiments when it comes to non-manipulable causes?
Why is causal explanation considered essential for generalizing causal descriptions?
Why is causal explanation considered essential for generalizing causal descriptions?
In what way do experimental methods differ from correlational studies concerning causation?
In what way do experimental methods differ from correlational studies concerning causation?
What is an example of a non-manipulable event that cannot serve as a cause in an experiment?
What is an example of a non-manipulable event that cannot serve as a cause in an experiment?
Flashcards
Prospect Theory Value Function
Prospect Theory Value Function
The value function in prospect theory measures changes in wealth from a reference point, unlike the traditional utility function which focuses on the absolute level of wealth.
Value Function Shape
Value Function Shape
The value function in prospect theory is convex for losses, meaning we are more likely to take risks to avoid losses. Conversely, it's concave for gains, indicating we're risk-averse when it comes to potential gains.
Loss Aversion
Loss Aversion
The value function is steeper for losses than gains, reflecting loss aversion. We feel the pain of a loss more strongly than the pleasure of an equal gain.
Risk Seeking in Losses
Risk Seeking in Losses
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Risk Aversion in Gains
Risk Aversion in Gains
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Reference Point
Reference Point
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Reference Point Impact
Reference Point Impact
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Prospect Theory vs. Utility Function
Prospect Theory vs. Utility Function
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Reference Dependence
Reference Dependence
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Diminishing Sensitivity
Diminishing Sensitivity
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Risk-Averse Behavior
Risk-Averse Behavior
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Risk-Seeking Behavior
Risk-Seeking Behavior
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Prospect Theory and Mixed Gambles
Prospect Theory and Mixed Gambles
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Prospect Theory and Bad Choices
Prospect Theory and Bad Choices
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Prospect Theory and Winning Nothing
Prospect Theory and Winning Nothing
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Prospect Theory's Disappointment Blindspot
Prospect Theory's Disappointment Blindspot
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Regret in Decision Making
Regret in Decision Making
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The Flaw of Independent Evaluation
The Flaw of Independent Evaluation
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Loss Aversion in Prospect Theory
Loss Aversion in Prospect Theory
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The Role of the Reference Point
The Role of the Reference Point
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Overestimating Rare Events
Overestimating Rare Events
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Decision Weights
Decision Weights
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Terrorism and Decision Weights
Terrorism and Decision Weights
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System 1 & Rare Events
System 1 & Rare Events
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Focused Attention & Vividness
Focused Attention & Vividness
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Confirmation Bias
Confirmation Bias
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Cognitive Ease
Cognitive Ease
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Denominator Neglect
Denominator Neglect
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Vivid Probabilities
Vivid Probabilities
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Emotional Outcomes
Emotional Outcomes
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Sensitivity to Probability
Sensitivity to Probability
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Certainty Effect
Certainty Effect
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Possibility Effect
Possibility Effect
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Vivid Imagery
Vivid Imagery
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Predicted Utility
Predicted Utility
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Decision Utility
Decision Utility
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Experienced Utility
Experienced Utility
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Prospect Theory
Prospect Theory
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Value Function
Value Function
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Confirmatory Bias of Memory
Confirmatory Bias of Memory
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Overweighting
Overweighting
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Rare Probabilities and Human Cognition
Rare Probabilities and Human Cognition
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Focusing on the Unlikely Event
Focusing on the Unlikely Event
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Availability Heuristic
Availability Heuristic
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Planning Fallacy
Planning Fallacy
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Vivid Outcomes
Vivid Outcomes
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Non-Linear Probability Weighting
Non-Linear Probability Weighting
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Prospect Theory: How We Make Decisions
Prospect Theory: How We Make Decisions
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The 'pi' Function in Prospect Theory
The 'pi' Function in Prospect Theory
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The Certainty Effect
The Certainty Effect
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Principle of Invariance vs. Framing Effect
Principle of Invariance vs. Framing Effect
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Is The Certainty Effect Rational?
Is The Certainty Effect Rational?
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Loss Aversion: The Pain of Losing
Loss Aversion: The Pain of Losing
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Risk-Seeking in the Face of Losses
Risk-Seeking in the Face of Losses
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Risk-Aversion in the Face of Gains
Risk-Aversion in the Face of Gains
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Independent Variables
Independent Variables
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Control Variables
Control Variables
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Dependent Variables
Dependent Variables
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Randomized Design
Randomized Design
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Repeated Measures Design
Repeated Measures Design
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Matched Groups Design
Matched Groups Design
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Mixed Design
Mixed Design
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Repeated Measures ANOVA
Repeated Measures ANOVA
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Random Groups Design
Random Groups Design
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Matched or Related Measures Design
Matched or Related Measures Design
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Independent Groups t-test
Independent Groups t-test
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Matched Pairs t-test
Matched Pairs t-test
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Single-Factor Design
Single-Factor Design
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Factorial Design
Factorial Design
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Completely Randomized Design
Completely Randomized Design
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Completely Repeated Measures Design
Completely Repeated Measures Design
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One-Way ANOVA
One-Way ANOVA
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One-Way Repeated Measures ANOVA
One-Way Repeated Measures ANOVA
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Interaction between variables
Interaction between variables
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Inus condition
Inus condition
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Counterfactual
Counterfactual
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Causal Relationship
Causal Relationship
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Effect
Effect
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Random-group independent variable
Random-group independent variable
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Generalization
Generalization
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Two-factor Experiment
Two-factor Experiment
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Framing Effect
Framing Effect
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Principle of Invariance
Principle of Invariance
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Experiment
Experiment
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Correlation
Correlation
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Causal Experiment
Causal Experiment
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Causal Description
Causal Description
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Causal Explanation
Causal Explanation
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Study Notes
Prospect Theory: Value Function
- Value is measured relative to a reference point, unlike utility, which is based on current wealth.
- Value functions are convex for losses (risk-taking) and concave for gains (risk aversion).
- Loss aversion: the value function is steeper for losses than for gains. This means losses are felt more strongly than equivalent gains.
Expected Value vs. Prospect Theory
- Expected value (EV): Outcome times probability of that outcome.
- Neoclassical economics: Utility function based on current wealth level.
- Prospect Theory: Value function based on changes from a reference point.
Key Findings and Examples
- Problem 1: 90% chance of $1,000 vs. receiving $900 for sure. Most chose the sure thing ($900), reflecting risk aversion.
- Problem 2: 90% chance of losing $1,000 vs. losing $900 for sure. Most chose the gamble (risk seeking). The psychological impact of losing $900 is greater than 90% of the psychological impact of losing $1,000 explains this.
- Problem 3: 50% chance to win $1,000 vs. $500 for sure. Most chose sure thing ($500), reflecting risk aversion.
- Problem 4: 50% chance to lose $1,000 vs. losing $500 for sure. Most chose the gamble. Loss aversion is evident.
- Reference Point: The reference point is the current state or a prior outcome in a decision, influencing whether an outcome is seen as a gain or loss.
Diminishing Sensitivity
- Loss and gain perceptions change based on the difference from the reference point. E.g., the difference between $900 and $1000 is less significant than the difference between $50 and $100.
Asian Disease Problem
- Illustrates how framing effects (presenting options in terms of lives saved or lost) affect decision-making. The choices people make about saving lives or letting people die differ from each other.
Blind Spots of Prospect Theory
- Probabilistic outcomes vs. sure outcomes. (e.g., getting $1 million is more appealing than getting a small amount with certainty).
- Failure to factor in disappointment or regret on likely outcomes; if a gamble is lost, the loss is felt more strongly, influencing the decision-making.
Other key concepts
- Loss Aversion: Losses loom larger than equivalent gains.
- Reference Dependence: Decisions depend on a reference point (current state or prior outcome), not just the final outcome.
- Framing Effects: How options are presented affects choices.
- Regret: The potential for regret to influence decisions when a gamble is taken or avoided.
- Denominator Neglect: The impact is greater when a rare event is framed in a way that makes it seem more likely (e.g., stating the risk of a permanent disability as “one in 100,000” versus “a 0.001% risk”).
- Certainty Effect: People tend to overweight outcomes that are certain compared to those with a probabilistic chance of the same outcome.
- Vivid Outcomes: Vivid or emotionally charged outcomes influence decisions more heavily than less emotive ones.
- Choice over description: When choices are framed in terms of possible gains, people tend to be risk averse, but when choices are framed in terms of losses, people tend toward risk seeking.
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Description
Explore the concepts of Prospect Theory, focusing on how value is determined relative to a reference point and the implications of loss aversion. This quiz examines key findings through practical examples that illustrate risk preferences when faced with uncertain outcomes.
