University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

165

Pages:

42
Author:

Kolby Dorsey

Decision making Visual illusions as a metaphor for DM Decision making A perspective on behavior as a collection of decision making tasks. Both explicit and implicit decisions? Sometimes decisions determine behavior and sometimes they are an epiphenomenon Economic theory is based on naive psychology, decision-making attempts to create a descriptively accurate foundation. Econ vs. psych Economics is a science that describes how people should behave --> rationality Sometimes it is confused with how people behave Mostly by economists Psychologists attempts to describe how people behave! (and why) Our goal To illustrate some fundamental differences between rationality and behavior Different assumptions / effects / behaviors lead to different implications The Rational agent model Calibrated Well informed Ordered preferences Stable preferences (mostly about tangibles) Controlled Selfish Calculating Implications People maximize What’s knowable is known All opportunities exploited Need no protection from themselves The “Boundedly rational” model Mediocre judgments Incoherent preferences Impulsive and myopic Reciprocating, trusting and vindictive Variable tastes (poorly predicted) Malleable preferences Implications People “solve” local decisions (context dependent, reference dependent, myopic, biased) Require paternalistic attention and help??? Topics to cover Regret Context effects ADS & Compromise Too much choice? Topics to cover (Social) The spotlight effect Magical thinking Regret Regret I Who would feel more regret Person A who missed his plane by 2 min Person B who missed his plane by 2 hours and 2 min Why? What does that mean? Regret II Who will feel happier Winner of the silver medal or the bronze medal in the olympic games? Why? Other predictions? Gambles & counterfactuals $100 10% 90% $15 10% 90% Regret III Who would feel more regret Person A who had a tree fall on their car Person B who took a different drive home and had a tree fall on their car Why???? Counterfactuals !!! Implications .... Regret & Markets What are some market mechanisms to increase regret? What are some market mechanisms to decrease regret? Regret Regret is a powerful force People care not only about states but also about their state relative to other states But, not all possible other states, just a few that come to mind ... Context effects Context effects A Attribute 1 B Attribute 2 Asymmetric dominance Introducing a dominated alternative An alternative that is worse on every attribute Should have no effect on choice Asymmetric dominance A A’ Attribute 1 B Attribute 2 Asymmetric dominance A Attribute 1 B’ Attribute 2 B Compromise effect A B C Attribute 1 D E Attribute 2 Compromise effect A B C Attribute 1 Attribute 2 Compromise effect B C Attribute 1 D Attribute 2 Compromise effect C Attribute 1 D E Attribute 2 Examples Bread makers Condoms in Bangladesh The economist Context effects People use context to evaluate the focal options. Implications....... Context effects Lessons: Evaluations and choices are relative People use the context to infer value Decisions are hard, relative decisions can be easy Too much choice ? An example The Jam study 6 jams 24 jams Approach 40% 60% Try 1.4 1.5 Buy 30% 3% Defaults & too many options Which would you pick Case I: You plan to spend the evening in the library working on a short paper due the following day. As you walk across campus you discover that an author you have always admired is about to give a public lecture. Do you proceed to the library anyway or go to the lecture instead? Case II: You plan to spend the evening in the library working on a short paper due the following day. As you walk across campus you discover that an author you have always admired is about to give a public lecture and that—in another hall—they are about to screen a foreign movie that you have been wanting to see. Do you proceed to the library anyway, go to the lecture instead, or go to the movie? Which would you pick Your patient is a 67-year-old farmer with chronic right hip pain. The diagnosis is osteoarthritis. You have tried several nonsteroidal anti-inﬂammatory agents (eg. aspirin, naproxen, and ketoprofen) and have stopped them because of either adverse effects or lack of efﬁcacy. You decide to refer him to an orthopedic consultant for consideration for hip replacement surgery. The patient agrees to this plan. Before sending him away, however, you check the drug formulary and ﬁnd that there Case I: is one nonsteroidal medication that this patient has not tried (ibuprofen). What do you do? Case II: are two nonsteroidal medications that this patient has not tried (ibuprofen and piroxicam). What do you do? y Sw ed en Po rtu ga l Po la nd Hu ng ar Fr an ce Be lg iu m a an y Au st ri G er m ar k Ne th er la nd Un s ite d Ki ng do m De nm Donating Organs? 100 80 60 40 20 0 What should we do? A few options or many? Jams, 401K, Movies, dating , etc. How would these influence: Approach & decisions? Defaults? -- How could we use these? Defaults & complexity? -- How could we use these? The “spotlight” effect The “spotlight” effect People think that other pay a lot of attention to them The “Barry Manilow” effect Magical thinking Magical thinking I How attractive is a chocolate shaped like a cockroach? stool? Magical thinking II How would you feel drinking from a brand new bedpan? Would you burn pictures of your loved ones? Summary Decision making summary We do it all the time, but how? One analogy: visual illusions --fast, most efficient, but susceptible to mistakes & to context influences Some specific examples: Regret Context effects (ADS & Compromise) Too much choice? Two “social” effects: The spotlight effect and magical thinking