Behavioural decision making samenvatting
Standard models of economics
1. People are rational and aim to maximize their utility
2. People are driven by monetary incentive
3. Optimal decisions are made at the margin
Expected utility theory
- Rational decision maker is able to maximize their utility by selecting among superior
alternatives
- When alternatives have similar outcomes, decision maker should be indifferent to these
alternatives
- Utility is dependent of final wealth
Expected utility theory =/ real life choice situations
Prospect theory (descriptive theory of behaviour): study peoples decisions under certain
conditions.
1. People are loss aversive (losses loom larger than gains)
2. Our risk propensity is determined by how options are framed.
3. People evaluate the consequences in terms of deviation from a reverence point (individual
status quo)
4. People experience diminished sensitivity to losses and gains.
Gain = risk aversive: you fear being disappointed if your luck does not hold,
which leads you to the safer option.
Loss = risk seeking: fear of loss leads most people to reject sure loss and
gamble on the bigger risk option.
The reference point plays a big role in the prospect theory.
Disposition effect: empirical finding that both individual investors and mutual
fund managers have a greater propensity to sell stocks that have risen in value
since purchase than stocks that have fallen in value. A investor holds on to the
stock that decreased in value in the hope of breaking even later on.
Endowment effect refers to two findings that may or may not be related.
- First is the exchange asymmetries: people don’t like exchanging things that they have
received.
- Second is WTA/WTP gaps between willing to accept and willing to pay: willingness to
accept = the amount of money that they would give something up for. Willingness to pay =
how much you would pay for something.
Both are related to loss aversion
1. Exchange asymmetry: people view an exchange as losing the item they were initially
given and gaining the other item. People are more sensitive to losses.
2. WTA/WTP: loss aversion predicts that
people will demand more money in
order to give up something than that
they are willing to pay for something.
Behavioural science helps us make sense of human
behaviour in real world contexts. By examining the
circumstances surrounding decisions, we can design
smarter, more effective interventions that drive
meaningful change.
, Conventional wisdom
- Are exclusively motivated by financial self interest
- Engage is cost benefit analysis
- Make conscious decisions
Our ability to make conscious decisions is limited and therefore we rely on mental shortcuts.
Sometimes these work in our favor and other times it biases our decisions. However, not all is lost as
we can be steered to making the right decisions.
Why experiments
- The key features are control over variables, careful measurement and establishing cause and
effect relationships
- Independent variable (the cause) is manipulated and the dependent variable (the effect) is
measured and any extraneous variables are controlled
- Randomly allocating participants to independent variable conditions means that all participants
should have an equal change of taking part in each condition. The principle of random
allocation is to avoid bias in the way the experiment is carried out and to limit the effects of
participant variables
Mediator: explains why or how something happens. (people get training get more knowledge
better prestation)
Moderator: has influence on the relationship and shows when something happens. (high workload
stress, but when you get support this relationship can be different)
Correlation: two things that happen together, but we don’t know why. Maybe it is a coincidence or
both are caused by something
Causation: one thing causes the other to happen.
Lecture 2
Two systems of thought
System 1: happens to you
- Fast/ intuitive
- Unconscious
- Automatic
- Everyday decisions
- Error prone
Advantages
- Responds quickly in crisis
- Comfortable with the familiar
- Makes associations which is good for expansive thinking
- Easy completion of routine or repetitive tasks
Disadvantages
- Jumps to conclusion
- Unhelpful emotional responses
- Makes mistakes unconsciously which can lead to biases and error prone judgements
System 2: is something you do
- Slow
- Conscious
- Effortful
- Complex/ first time decisions
Standard models of economics
1. People are rational and aim to maximize their utility
2. People are driven by monetary incentive
3. Optimal decisions are made at the margin
Expected utility theory
- Rational decision maker is able to maximize their utility by selecting among superior
alternatives
- When alternatives have similar outcomes, decision maker should be indifferent to these
alternatives
- Utility is dependent of final wealth
Expected utility theory =/ real life choice situations
Prospect theory (descriptive theory of behaviour): study peoples decisions under certain
conditions.
1. People are loss aversive (losses loom larger than gains)
2. Our risk propensity is determined by how options are framed.
3. People evaluate the consequences in terms of deviation from a reverence point (individual
status quo)
4. People experience diminished sensitivity to losses and gains.
Gain = risk aversive: you fear being disappointed if your luck does not hold,
which leads you to the safer option.
Loss = risk seeking: fear of loss leads most people to reject sure loss and
gamble on the bigger risk option.
The reference point plays a big role in the prospect theory.
Disposition effect: empirical finding that both individual investors and mutual
fund managers have a greater propensity to sell stocks that have risen in value
since purchase than stocks that have fallen in value. A investor holds on to the
stock that decreased in value in the hope of breaking even later on.
Endowment effect refers to two findings that may or may not be related.
- First is the exchange asymmetries: people don’t like exchanging things that they have
received.
- Second is WTA/WTP gaps between willing to accept and willing to pay: willingness to
accept = the amount of money that they would give something up for. Willingness to pay =
how much you would pay for something.
Both are related to loss aversion
1. Exchange asymmetry: people view an exchange as losing the item they were initially
given and gaining the other item. People are more sensitive to losses.
2. WTA/WTP: loss aversion predicts that
people will demand more money in
order to give up something than that
they are willing to pay for something.
Behavioural science helps us make sense of human
behaviour in real world contexts. By examining the
circumstances surrounding decisions, we can design
smarter, more effective interventions that drive
meaningful change.
, Conventional wisdom
- Are exclusively motivated by financial self interest
- Engage is cost benefit analysis
- Make conscious decisions
Our ability to make conscious decisions is limited and therefore we rely on mental shortcuts.
Sometimes these work in our favor and other times it biases our decisions. However, not all is lost as
we can be steered to making the right decisions.
Why experiments
- The key features are control over variables, careful measurement and establishing cause and
effect relationships
- Independent variable (the cause) is manipulated and the dependent variable (the effect) is
measured and any extraneous variables are controlled
- Randomly allocating participants to independent variable conditions means that all participants
should have an equal change of taking part in each condition. The principle of random
allocation is to avoid bias in the way the experiment is carried out and to limit the effects of
participant variables
Mediator: explains why or how something happens. (people get training get more knowledge
better prestation)
Moderator: has influence on the relationship and shows when something happens. (high workload
stress, but when you get support this relationship can be different)
Correlation: two things that happen together, but we don’t know why. Maybe it is a coincidence or
both are caused by something
Causation: one thing causes the other to happen.
Lecture 2
Two systems of thought
System 1: happens to you
- Fast/ intuitive
- Unconscious
- Automatic
- Everyday decisions
- Error prone
Advantages
- Responds quickly in crisis
- Comfortable with the familiar
- Makes associations which is good for expansive thinking
- Easy completion of routine or repetitive tasks
Disadvantages
- Jumps to conclusion
- Unhelpful emotional responses
- Makes mistakes unconsciously which can lead to biases and error prone judgements
System 2: is something you do
- Slow
- Conscious
- Effortful
- Complex/ first time decisions
