1. Decision

2. Decision Summary Descriptive, normative, prescriptive Expected Utility: normative theory of decision Psychology of decision Prospect theory: descriptive theory of decision Thinking map: prescription for deciding Clues for finding omitted information (continuation)

3. Theories Descriptive What is Normative What is better Prescriptive What to do

4. Theories Example: Shopping for groceries

5. Theories Descriptive: prices, products, supermarkets…

6. Theories Example: Shopping for groceries Descriptive: prices, products, supermarkets… Normative: a better deal is less $$, more, quality…

7. Theories Example: Shopping for groceries Descriptive: prices, products, supermarkets… Normative: a better deal is less $$, more, quality… Prescriptive: 1º LIDL; 2º Feira Nova for the rest

8. Expected Utility Normative theory of decision Utility in a broad sense (“goodness”)

9. Premises of Expected Utility Values are relative -How is your wife? -Compared to what?

10. Premises of Expected Utility Weak (partial) ordering. Either prefers A to B, prefers B to A, or indifferent Transitive: if prefers A to B and B to C, prefers A to C

11. Premises of Expected Utility Weak (partial) ordering. Sure thing principle 1%99% Game XCarCrackers Game YLuxury CruiseCrackers Ignore crackers when picking game

12. Expected Utility Weak (partial) ordering. Sure thing Implies that: E.U. =  p i x u i Expected utility is the sum of the utilities of outcomes multiplied by their probabilities

13. Expected Utility Example: Lottery :50,000€ with 1/100,000 probability. Expected utility = 50,000/100,000 + 1*(-20)= -19.5€ (is utility equal to monetary value?...)

14. Psychology of Decision

15. Thinking: one-sided versus two-sided

16. Psychology of Decision Thinking: one-sided versus two-sided Favouring one-sided thinking: Hesitation or changing one’s mind is bad Mimicking experts Confusing decision with advocacy

17. Psychology of Decision Thinking: Self deception

18. Psychology of Decision Thinking: Self deception Test: cold pressor pain test With Good/bad heart, exercise increased tolerance Exercise, repeat test Resistance changed depending on what subjects were told…

19. Psychology of Decision Thinking: Self deception Most drivers believe they are better than average Most people believe to have better than average chances of reaching 80

20. Psychology of Decision Thinking: Belief overkill People opposed to nuclear tests believe them to be a medical danger, source of instability, and not lead to improvements. People in favour believed the opposite.

21. Psychology of Decision Thinking: Belief overkill People opposed to death penalty believe not to be deterrent and morally wrong People in favour believed it to be a deterrent and morally acceptable.

22. Psychology of Decision Bernoulli, St. Petersburg Paradox: Flip coin until it lands “heads”. Pays 1€ if on first throw, 2€ on second, 4€ on third…

23. Psychology of Decision Bernoulli, St. Petersburg Paradox: Flip coin until it lands “heads”. Pays 1€ if on first throw, 2€ on second, 4€ on third… Expected: ½ * 1+ ¼ * 2 + 1/8 * 4 +… = ½ + ½ + ½ + … = 

24. Psychology of Decision Bernoulli, St. Petersburg Paradox: With infinite expected return anyone should pay to play this game. Why don’t they?

25. Psychology of Decision Bernoulli, St. Petersburg Paradox: Utility is a log function of value?

26. Psychology of Decision Framing: Game 1: 25% chance of winning level. Must choose prize: A: 100% 30€B: 80% 45€

27. Psychology of Decision Framing: Game 1: 25% chance of winning level. Must choose prize: A: 100% 30€B: 80% 45€ Game 2: A: 25% 30€B: 20% 45€

28. Psychology of Decision Allais Paradox (sure thing) Situation X: 1: 100% 1k€2:89% 1k€ 10% 5k€ 1% 0€ Situation Y: 3: 11% 1k€ 89% 0€4:10% 5k€ 90% 0€

29. Psychology of Decision Allais Paradox (sure thing) Situation X: 1: 100% 1k€2:89% 1k€ 10% 5k€ 1% 0€ Situation Y: 3: 11% 1k€ 89% 0€4:10% 5k€ 90% 0€

30. Psychology of Decision Allais Paradox (sure thing) Equivalent to: 12-1112-100 Situation X: 1:1k€1k€1k€ 2:0€5k€1k€ Situation Y: 3:1k€1k€0€ 4:0€5k€0€

31. Prospect Theory Kahneman, Tversky, 1979

32. Prospect Theory Probability: , not p

33. Prospect Theory Probability: , not p Allais paradox Game 30€ or 45€

34. Prospect Theory Utility not linear:

35. Prospect Theory Framing effects: Gas 0.95€ Card Surcharge 0.05€ Gas 1.00€ Cash discount 0.05€

36. Prospect Theory Framing effects: Outbreak expected to Kill 600. A: Save 200 B: Save 600, p=33%

37. Prospect Theory Framing effects: Outbreak expected to Kill 600. A: 400 die B: 600 die, p=67%

38. Prescriptive: Thinking Map 1. Necessity. Objectives. 2. Recommendations? 3. Options/Alternatives. 4. Consequences: Likelihood and Importance 5. Compare the alternatives. 6. Feasibility and contingency plans. 7. Check the cost of deciding.

39. Prescriptive: Thinking Map 1. Necessity. Objectives. 2. Recommendations? Keep in mind the objectives. Look for previous solutions or recommended actions.

40. Prescriptive: Thinking Map 3. Options/Alternatives. 4. Consequences: Likelihood and Importance Decision is a search process. Consider different alternatives. Check if you have enough information to estimate consequences and likely outcomes. Avoid single-mindedness…

41. Clues for finding omitted information (continued from last lecture) 7. Missing or incomplete figures, graphs, tables or data a. Would the figure look different if it included evidence from earlier or later years? b. Has the author “stretched” the figure to make the difference look larger?

42. Clues for finding omitted information 8. Omitted effects, both positive and negative, and both short- and long-term, of what is advocated or what is opposed a. Has the argument left out important positive or negative consequences of a proposed action? b. Do we need to know the impact of the action on any of the following areas: political, social, economic, biological, spiritual, health, or environmental?

43. Clues for finding omitted information 9. Context of quotes and testimonials Has a quote or testimonial been taken out of context? 10. Benefits accruing to the author from convincing others to follow his advice? Will the author benefit financially if we adopt his proposed policy? 11. Has the author left out any other information I need to know before I make my judgement?

44. Importance of the negative view There is one type of omitted information that is so important to identify: the potential negative effects of actions being advocated There is one type of omitted information that is so important to identify: the potential negative effects of actions being advocated We need to ask: We need to ask: –Which segments of society do not benefit from a proposed action? Who loses? What do the losers have to say about it? –How does the proposed action affect the distribution of power?

45. Importance of the negative view –Does the action influence the extent of democracy in our society? –How does a particular action affect how we view the world: what we think, how we think, and what we know and can know? –What the are the action’s effects on our health?

46. Importance of the negative view –How does the action influence our relationships with one another? With the natural environment? –Will the action have a slow, cumulative impact? –What are the potential long-term negative effects of the action?

47. Importance of the negative view Opportunity costs. What do we loose by not gaining something else? E.g. Investment 1: returns €11,500 Investment 2: returns €11,000 but we must use material worth €1,000

48. Prescriptive: Thinking Map 5. Compare the alternatives. Expected utility. Weigh multiple attributes.

49. Prescriptive: Thinking Map 6. Feasibility and contingency plans. 7. Check the cost of deciding. Decision and implementation must be feasible.

50. Extras: Aula de dúvidas ou aula extra de exercícios? Ficha 3: vai estar online esta semana. Decisão: qual o tema do trabalho 2. Dúvidas...