1. Cognitive Processes PSY 334 Chapter 10 – Reasoning & Decision-Making

2. Judgments of Probability  People can be biased in their estimates when they depend upon memory.  Tversky & Kahneman – differential availability of examples. Proportion of words beginning with k vs words with k in 3 rd position (3 x as many). Sequences of coin tosses – HTHTTH just as likely as HHHHHH.

3. Gambler’s Fallacy  The idea that over a period of time things will even out.  Fallacy -- If something has not occurred in a while, then it is more likely due to the “law of averages.”  People lose more because they expect their luck to turn after a string of losses. Dice do not know or care what happened before.

4. Chance, Luck & Superstition  We tend to see more structure than may exist: Avoidance of chance as an explanation Conspiracy theories Illusory correlation – distinctive pairings are more accessible to memory.  Results of studies are expressed as probabilities. The “person who” is frequently more convincing than a statistical result.

5. Decision Making  Choices made based on estimates of probability.  Described as “gambles.”  Which would you choose? $400 with a 100% certainty $1000 with a 50% certainty

6. Utility Theory  Prescriptive norm – people should choose the gamble with the highest expected value.  Expected value = value x probability.  Which would you choose? A -- $8 with a 1/3 probability B -- $3 with a 5/6 probability  Most subjects choose B

7. Subjective Utility  The utility function is not linear but curved. It takes more than a doubling of a bet to double its utility ($8 not $6 is double $3).  The function is steeper in the loss region than in gains: A – Gain or lose $10 with.5 probability B -- Lose nothing with certainty People pick B

8. Framing Effects  Behavior depends on where you are on the subjective utility curve. A $5 discount means more when it is a higher percentage of the price. $15 vs $10 is worth more than $125 vs $120.  People prefer bets that describe saving vs losing, even when the probabilities are the same.