Explain the differences between normative and descriptive theories of decisionmaking
Normative (Prescriptive) Theories of Decision Making
- How to make the best decision
- Hard and often impossible to use normative theories
Descriptive Theories of Decision Making
- How do we actually make decisions?
- How do we learn to make the best decisions?
- How do we know we are making the best decision?
Explain, with examples, the role of heuristics (such as: Representative Heuristic;
Availability Heuristic; Gambler’s Fallacy; Planning Fallacy; Anchoring; Clustering Illusion) in common errors of judgment and decision-making
- Heuristics help make it easier to get the normative answer
- Representative heuristic – assign high probability of events that are typical of a class
- Availability heuristic – what we can recall easily we think happens more
- Gambler’s fallacy – if I spin red on the wheel 5 times in a row, what is the chance the next one will be green?
- Planning fallacy – things take longer than expected, and people are poor at estimating this across a wide range of problems
- Clustering illusion – people believe in false correlations too much (correlation vs. causation)
- Anchoring – we can be biased by completely irrelevant information
Describe, with examples, some reasons we may fail to use base-rate information in making decisions
- Often don’t know the real base rate probabilities
- Base rate reasoning depends on our own experience
- Even if people are logical, it is not necessarily the case that probabilities/frequencies are the only things we use
- Rational choices based on expected utility – maximize chanced of gain (probability of a given outcome)*(utility of outcome)
- Prospect Theory (Tversky & Kahneman)
- People identify a reference point generally representing their current state
- People are much more sensitive to potential losses than to potential gains – loss aversion
Social functionalist approach (Tetlock, 2002)
- Decision making constrained by social and cultural context
- We want to be able to justify our decisions to other people
Explain with examples the sunk cost effect and its implications for decision making in everyday life
- If people lose money, they have a greater tendency to continue to lose money to try and retrieve that money
- g. How some gamblers become in-debt
Explain the concept of “Framing” and how it can affect decision-making
- Decisions are influenced by irrelevant aspects of the situation
- Framing is a common media bias
- g. anti-vaccination supporters (due to risk of autism) even though it has been discredited and even if this is the case the chances are a lot higher of contracting the diseases