Dominique van Schagen Judgment and Decision Making
JDM all lectures
Judgment and Decision Making Lecture 2
Major reflective decisions
- buy a house
- invest or not
Low level decisions
- what to wear today
Factors that should affect a decision:
- what you want (to avoid)
-
Rational decision making process:
- define the problem
- identify decision criteria
- weigh the identified decision making criteria
- generate possible alternatives
- rate each alternative against the decision maker’s criteria
- compute the optimal decision
Assumptions need to be made before making a decision:
- assume the decision maker is rational
- assume the problem is clear and unambiguous
- assume the decision maker has complete information
- assume
- assume
expected utility theory:
A gamble consists of:
1. Probability p
2. Value v
Expected value of a gamble (EV) = p x v
4 principles (Axioms)
- Dominance
alternative gambles can be ranked from best to worst in terms of expected value.
Preferences should be consistent (not to be changed by framing for example)
- Cancellation
a choice between gambles should depend only on those outcomes that differ (options
that are the same but differently formulated should cancel out)
- Transitivity
if you prefer A to B and B to C, then you must prefer A to C
, Dominique van Schagen Judgment and Decision Making
- Invariance
preference should remain invariant of stable, no matter how choices are described
Prospect theory:
- Describes reality better and will be better predictable than expected utility theory
- Reference point can change, is subjective because losing/winning is compared to the
environment
- Value function: v(x-r)
- Reference point because:
o People compare income to friends, parents, goals, expectations, ,…
o Easier to compare with an r than evaluate absolute utility
o Natural degree of adaptation (e.g. brightness, loudness, temperature, …)
Loss aversion:
The pain associated with a loss of a given amount is larger
JDM lecture 3 – mental accounting
What is mental accounting?
- Compare with financial/managerial accounting
- “set of operations used by individuals and households to organize, evaluate, and keep
track of financial activities”
Framing outcomes
- Minimal account
o Examining only differences between two options, disregarding all other
features (same answer in both versions example question)
- Topical account
o Relates consequences of possible choices to reference level determined by
context within which decision arises (alter choices example question)
- Comprehensive account
o Incorporates all other factors (same answer in both versions example question)
How does someone wish to frame receipt of multiple outcomes?
- Given shape value function, should look like this:
o Segregate gains
o Integrate losses
o Integrate smaller losses with larger gains
o Segregate small gains from larger losses
GAINS: hedonic editing hypothesis supported
- Temporal separation produces more happiness
LOSSES: hypothesis not supported
- Idea that separating losses is a good idea
IMPLICATIONS:
JDM all lectures
Judgment and Decision Making Lecture 2
Major reflective decisions
- buy a house
- invest or not
Low level decisions
- what to wear today
Factors that should affect a decision:
- what you want (to avoid)
-
Rational decision making process:
- define the problem
- identify decision criteria
- weigh the identified decision making criteria
- generate possible alternatives
- rate each alternative against the decision maker’s criteria
- compute the optimal decision
Assumptions need to be made before making a decision:
- assume the decision maker is rational
- assume the problem is clear and unambiguous
- assume the decision maker has complete information
- assume
- assume
expected utility theory:
A gamble consists of:
1. Probability p
2. Value v
Expected value of a gamble (EV) = p x v
4 principles (Axioms)
- Dominance
alternative gambles can be ranked from best to worst in terms of expected value.
Preferences should be consistent (not to be changed by framing for example)
- Cancellation
a choice between gambles should depend only on those outcomes that differ (options
that are the same but differently formulated should cancel out)
- Transitivity
if you prefer A to B and B to C, then you must prefer A to C
, Dominique van Schagen Judgment and Decision Making
- Invariance
preference should remain invariant of stable, no matter how choices are described
Prospect theory:
- Describes reality better and will be better predictable than expected utility theory
- Reference point can change, is subjective because losing/winning is compared to the
environment
- Value function: v(x-r)
- Reference point because:
o People compare income to friends, parents, goals, expectations, ,…
o Easier to compare with an r than evaluate absolute utility
o Natural degree of adaptation (e.g. brightness, loudness, temperature, …)
Loss aversion:
The pain associated with a loss of a given amount is larger
JDM lecture 3 – mental accounting
What is mental accounting?
- Compare with financial/managerial accounting
- “set of operations used by individuals and households to organize, evaluate, and keep
track of financial activities”
Framing outcomes
- Minimal account
o Examining only differences between two options, disregarding all other
features (same answer in both versions example question)
- Topical account
o Relates consequences of possible choices to reference level determined by
context within which decision arises (alter choices example question)
- Comprehensive account
o Incorporates all other factors (same answer in both versions example question)
How does someone wish to frame receipt of multiple outcomes?
- Given shape value function, should look like this:
o Segregate gains
o Integrate losses
o Integrate smaller losses with larger gains
o Segregate small gains from larger losses
GAINS: hedonic editing hypothesis supported
- Temporal separation produces more happiness
LOSSES: hypothesis not supported
- Idea that separating losses is a good idea
IMPLICATIONS:
