Module 8 Decision Making

Cognitive Psychology Notes Module 8: Decision Making Judgment vs. Decision Making Judgment:  Assess likelihood of events using incomplete information.  Accuracy is key for evaluating judgments.  Initial step in decision-making. Decision Making:  How people choose actions to achieve goals.  Quality of decisions depends on the situation's importance. Judgment Bayesian Inference:  Updates initial beliefs (prior probabilities) based on new evidence (posterior probabilities). Example: Taxi Cab Problem (Kahneman & Tversky, 1972):  Scenario: Witness identifies a taxi as Blue.  Prior Probabilities: 85% Green, 15% Blue.  Witness Accuracy: 80% correct when saying it’s Blue, 20% wrong when saying it’s Blue for a Green taxi.  Calculations: o Odds ratio: 12:17 o Final probabilities: 41% Blue, 59% Green. Neglecting Base Rates:  People often ignore the base rate (how common an event is) and focus too much on new evidence. Heuristics Types of Heuristics:  Representativeness Heuristic: Judging category membership based on appearance.  Conjunction Fallacy (Tversky & Kahneman, 1983): o Mistaken belief that combined events are more likely than individual ones (e.g., believing Jane is more likely a feminist public servant than just a public servant).  Availability Heuristic (Kahneman & Tversky, 1974): o Frequency estimates based on how easily examples come to mind (e.g., overestimating murder rates compared to suicide).  Support Theory (Tversky & Koehler, 1994): o Perception of likelihood changes with how an event is described.  Fast-and-Frugal Heuristics: o Simple strategies for quick decisions (e.g., Take-the-Best heuristic). Dual-Process Theory (Kahneman, 2003) Systems:  System 1: o Intuitive, automatic, and quick. o Most heuristics rely on this system.  System 2: o Analytical, slower, and requires effort. o Used for more complex decision-making.  Serial processing: System 1 → System 2, Parallel processing: System 1 / System 2 Dual-process theory: evaluation  Strengths o Reasonable evidence for the existence of two different processing streams  Most judgements appear to be determined by something like System #1 o Explains individual differences in judgement performance  Those relying more heavily on System #2 will be advantaged  Limitations o People make more use of baserate information than assumed o Error-prone performance may not relate to System 1 o Not very explicit about the processes involved in judgement o Processes may operate as parallel, rather than serially Expected Utility Theory (Neumann & Morgenstern, 1944)  Decision maker chooses between risky or uncertain prospects by comparing their expected utility.  Expected utility = (prob. of outcome) x (utility of outcome)  Rational decision making (i.e., maximise gains and minimise losses) Irrational decision-making  Rational decision-making: maximise gains and minimise losses  Expected utility theory does not account for actual/irrational decisionmaking. Prospect theory (Kahneman & Tversky, 1979, 1984)  To explain irrational decision-making.  Two main assumptions: o (1) Reference point (present state) o (2) More sensitive to potential losses than potential gains (i.e., loss aversion) Sunk cost effect  Sunk-cost effect – the tendency to pursue a course of action even after it has proved to be suboptimal – ‘throwing good money after bad’  Example You have concert tickets to see a band. While travelling to the concert your car breaks down. You call roadside assistance, you wait for 45 minutes and in the end your car gets towed…..You end up calling a taxi to take you to the concert even though you don’t feel like going now Framing effect  Framing effect - Decisions are influenced by irrelevant aspects of the situation.  Example (from Tversky & Kahneman, 1981) Outbreak of unusual disease is likely to kill 600 people Prospect Theory  More adequate than expected utility theory o Ecologically valid o Limitations:  No explicit rationale for value function  Oversimplified – neglects cognitive processes - Loss aversion not always found  Little attention to social and emotional factors