Behavioral decision making - 2020
Dikgedrukt= Kopje of hoofdstuk
Onderstreept= Betekenis
Schuingedrukt= Belangrijk
*tussen sterretjes*= Komt uit het boek, niet uit het college
VB./ Ex.= Voorbeeld / example
Group Enrollment: Students will have to enroll themselves in a group. Enrollment to groups
will open on Monday, September 7th, at 13:00 and close Wednesday, September 9th at 17:00.
Enrollment takes place on the Nestor course page.
Brain Storming (Tutorial 1): During Tutorial 1, each group is required to present three can-
didate problems for their assignment and explicate which psychological process, heuristic, or
bias can be considered to come up with an appropriate intervention for their problem.
Presentation (Tutorial 2): Each group will have 5 minutes (depending on the final number of
groups) to present their project. The purpose of this presentation is to receive feedback where
necessary and ensure that all groups are on track. You can create your presentation in Power-
Point. The video is only for the final submission.
Final Assignment Submission: Students should submit their video through the course page
no later than October 23rd, at 17:00. Late assignments will not be accepted and lead to a FAIL-
ING of the course. Instruction on how to upload the assignment will be made available on the
course page on Nestor closer to the submission date.
Lecture 1 7-09 11.00-13.00
Are humans rational? Do we make rational decisions?
- What defines rational decision? Humans make decisions based on three ideas (standard
models of economics):
1. People are rational and aim to maximize their utility. We make decisions on what gives us
the most benefits or utility.
2. People are driven by monetary incentive. Any effort we show is a reflection of the amount
of money we receive. Example: small amount of money is small effort.
1. Optimal decisions are made at the margin. Any activity should out weight the cost. Or it is
not profitable for us humans to do.
The economic man (homo economicus)
Prevailed the view of human beings who seek optimal and maximizing outcomes. They create a
model that is predictive of rational decision making —> expected utility theory (normative
theory of behavior). Tells us how humans should and do behave.
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 (i.e. Deviations from
current state wealth are inconsequential). <— It doesn’t matter if you loose or gain money, but
at a certain point how much money you will have.
Expected utility theory ≠ real-life choice situations
When you have a gamble (pre-work you had to do):
- 60% of 100$ and 40% of 0$ chance of winning.
- 100% of 50$ and 0% of 0$ chance of winning.
—> People maximize utility (expected value) will be probability * value =
A) 0.6 * 100 + 0.4 * 0 = 60$
B) 1.0 * 50 +0 * 0 - 50$
So then you are likely to pick answer A. Utility of A (60$) > Utility of B (50$).
As us, students, answered 80% B. Since we did not use the utility theory. Therefor, expected
utility theory ≠ real-life choice situations. Answer B is for sure a gamble, that makes it risk-
aversive. We prefer something that is certain.
, Economists adopted the expected utility model as (1) a logic that defines how decision should
be made and a theory of how people do make decision people do follow and (2) a descriptions
of how economists make choices.
Psychologists noticed that the expected utility model makes faulty predictions about human
decision-making that that doesn’t reflect how decision are made in real-life. Therefore, they set
out to understand how humans actually make decision without making any assumptions about
their rationality.
This difference is how the prospect theory was brought alive. How do people value future
outcomes or prospects? A descriptive instead of normative theory. This is based on experience
and not on assumptions.
Prospect theory (descriptive theory of behavior):
1. People are loss aversive (losses loom larger than gains). The pain of a loss is felt more than
the joy of a gain.
2. Our risk propensity if determined by how options are framed. How willing are we to take the
risk of loss or gain.
3. People evaluate the consequences in terms of deviation from a reference point ( individuals
status quo). Status quo bias= an emotional preference for the current situation and inaction,
lack of desire to change anything about their current circumstances. Evidence for status quo
bias has been provided through the Default Option. When given a choice (like to opt-out
frame), individuals are more likely to stick with the current default option.
4. People experience diminished sensitivity to losses and gains. You can become habituated to
gains, as the first gain can have a huge impact. I.e. from homeless to a roof above your head,
but going from millionaire to billionaire is less shocking and joyful. The only thing about hitting
rock bottom is that it can’t get any worse.
It concludes; we measure them against a reference point and how aversive we are against a
certain loss or gain. Instead of measuring an assumption.
Prospect theory (framing choices and loss aversion):
The gain frame (risk aversion)= is a reaction of the risk aversion. To avoid taking risk, we
rather go with the things that are most certain.
The loss frame (risk seeking)= people are given bad options, so it can’t get any worse. So a lot
choose risk seeking behavior.
Losses loom larger than gain since the pain from loss is higher than the pleasure of gain. Loss
> Gain.
The framing style influences us leads us to risk aversion or risk seeking.
Prospect theory (reference dependence):
Consider both psychological value and monetary value in this state.
What are the implications of the prospect theory?
- It all depends on how the framing effect, loss aversion, endowment effect, mental accounting
& sunk cost and status quo bias are used in real-life. All various implications of the prospect
theory. (will be explained throughout the weeks).
Conventional (economic) wisdom= are exclusively motivated by financial self-interest, engage
is cost-benefit analysis and make conscious decisions.
Experimental research= One way of investigating research. Just because two variables are
related to each other, doesn’t mean that one is causing the other. Correlation data= it can be
related but will not be caused by one or another. Correlation vs Causality.
Why experiments? The key features are control over variables, careful measurement and
establishing cause and effect relationships (casual 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 chance 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.
Dikgedrukt= Kopje of hoofdstuk
Onderstreept= Betekenis
Schuingedrukt= Belangrijk
*tussen sterretjes*= Komt uit het boek, niet uit het college
VB./ Ex.= Voorbeeld / example
Group Enrollment: Students will have to enroll themselves in a group. Enrollment to groups
will open on Monday, September 7th, at 13:00 and close Wednesday, September 9th at 17:00.
Enrollment takes place on the Nestor course page.
Brain Storming (Tutorial 1): During Tutorial 1, each group is required to present three can-
didate problems for their assignment and explicate which psychological process, heuristic, or
bias can be considered to come up with an appropriate intervention for their problem.
Presentation (Tutorial 2): Each group will have 5 minutes (depending on the final number of
groups) to present their project. The purpose of this presentation is to receive feedback where
necessary and ensure that all groups are on track. You can create your presentation in Power-
Point. The video is only for the final submission.
Final Assignment Submission: Students should submit their video through the course page
no later than October 23rd, at 17:00. Late assignments will not be accepted and lead to a FAIL-
ING of the course. Instruction on how to upload the assignment will be made available on the
course page on Nestor closer to the submission date.
Lecture 1 7-09 11.00-13.00
Are humans rational? Do we make rational decisions?
- What defines rational decision? Humans make decisions based on three ideas (standard
models of economics):
1. People are rational and aim to maximize their utility. We make decisions on what gives us
the most benefits or utility.
2. People are driven by monetary incentive. Any effort we show is a reflection of the amount
of money we receive. Example: small amount of money is small effort.
1. Optimal decisions are made at the margin. Any activity should out weight the cost. Or it is
not profitable for us humans to do.
The economic man (homo economicus)
Prevailed the view of human beings who seek optimal and maximizing outcomes. They create a
model that is predictive of rational decision making —> expected utility theory (normative
theory of behavior). Tells us how humans should and do behave.
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 (i.e. Deviations from
current state wealth are inconsequential). <— It doesn’t matter if you loose or gain money, but
at a certain point how much money you will have.
Expected utility theory ≠ real-life choice situations
When you have a gamble (pre-work you had to do):
- 60% of 100$ and 40% of 0$ chance of winning.
- 100% of 50$ and 0% of 0$ chance of winning.
—> People maximize utility (expected value) will be probability * value =
A) 0.6 * 100 + 0.4 * 0 = 60$
B) 1.0 * 50 +0 * 0 - 50$
So then you are likely to pick answer A. Utility of A (60$) > Utility of B (50$).
As us, students, answered 80% B. Since we did not use the utility theory. Therefor, expected
utility theory ≠ real-life choice situations. Answer B is for sure a gamble, that makes it risk-
aversive. We prefer something that is certain.
, Economists adopted the expected utility model as (1) a logic that defines how decision should
be made and a theory of how people do make decision people do follow and (2) a descriptions
of how economists make choices.
Psychologists noticed that the expected utility model makes faulty predictions about human
decision-making that that doesn’t reflect how decision are made in real-life. Therefore, they set
out to understand how humans actually make decision without making any assumptions about
their rationality.
This difference is how the prospect theory was brought alive. How do people value future
outcomes or prospects? A descriptive instead of normative theory. This is based on experience
and not on assumptions.
Prospect theory (descriptive theory of behavior):
1. People are loss aversive (losses loom larger than gains). The pain of a loss is felt more than
the joy of a gain.
2. Our risk propensity if determined by how options are framed. How willing are we to take the
risk of loss or gain.
3. People evaluate the consequences in terms of deviation from a reference point ( individuals
status quo). Status quo bias= an emotional preference for the current situation and inaction,
lack of desire to change anything about their current circumstances. Evidence for status quo
bias has been provided through the Default Option. When given a choice (like to opt-out
frame), individuals are more likely to stick with the current default option.
4. People experience diminished sensitivity to losses and gains. You can become habituated to
gains, as the first gain can have a huge impact. I.e. from homeless to a roof above your head,
but going from millionaire to billionaire is less shocking and joyful. The only thing about hitting
rock bottom is that it can’t get any worse.
It concludes; we measure them against a reference point and how aversive we are against a
certain loss or gain. Instead of measuring an assumption.
Prospect theory (framing choices and loss aversion):
The gain frame (risk aversion)= is a reaction of the risk aversion. To avoid taking risk, we
rather go with the things that are most certain.
The loss frame (risk seeking)= people are given bad options, so it can’t get any worse. So a lot
choose risk seeking behavior.
Losses loom larger than gain since the pain from loss is higher than the pleasure of gain. Loss
> Gain.
The framing style influences us leads us to risk aversion or risk seeking.
Prospect theory (reference dependence):
Consider both psychological value and monetary value in this state.
What are the implications of the prospect theory?
- It all depends on how the framing effect, loss aversion, endowment effect, mental accounting
& sunk cost and status quo bias are used in real-life. All various implications of the prospect
theory. (will be explained throughout the weeks).
Conventional (economic) wisdom= are exclusively motivated by financial self-interest, engage
is cost-benefit analysis and make conscious decisions.
Experimental research= One way of investigating research. Just because two variables are
related to each other, doesn’t mean that one is causing the other. Correlation data= it can be
related but will not be caused by one or another. Correlation vs Causality.
Why experiments? The key features are control over variables, careful measurement and
establishing cause and effect relationships (casual 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 chance 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.
