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Definition
| tendency to prefer an alternative is enhanced or hindered depending on whether the tradeoffs within the set under consideration are favorable or unfavorable to that alternative |
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| within an offered set, options with extreme values are relatively less attractive than options with intermediate values |
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EU = pU(v+x) + qU(w+y
the theory that a decision maker's choice based on a set of rational rules (axiom) and derived utilities (real numbers representing personal value) is such that one alternative with probabilistic consequences is preferred to another if and only if its expected utility is greater than that of the other alternative |
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| comparability (1st axiom of EU theory) |
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| transitivity (2nd axiom of EU theory) |
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| closure (3rd axiom of EU theory) |
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| adding two positive numbers yields a third positive number |
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| distribution of probabilities across alternatives (4th axiom of EU theory) |
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| consistency across stages of outcomes, need to follow principles of probability theory |
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| independence (5th axiom of EU theory) |
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Definition
each alternative should be evaluated independently, no framing
if one alternative is preferred to another, that should always be the preference, even if a third alternative is introduced |
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| consistency (6th axiom of EU theory) |
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Definition
| if we prefer one alternative to another, we prefer at least some chance of receiving that alternative rather than the other one |
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| describes choices influenced by the way the consequences are framed, rather than solely by the consequence themselves, violates independence axiom |
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| solvability (7th axiom of EU theory) |
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Definition
no alternative is so much better or worse than another that some probability mixture of alternative on either side is not regarded as equivalent to the original alternative
if x > y, then there exists a z where x < zy |
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| von Neumann and Morgenstern |
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Definition
| 1947 scholars who contributed subjective expected utility theory and its 7 axioms |
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| "A normative, rational decision theory" lays out formal definitions of rationality and von Neumann and Morgenstern's subjective expected utility theory |
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| humans deviate from normative model, describes Kahneman and Tversky's prospect theory, discusses opportunity costs and endowment effect, sunk costs, choosing not to choose and regret, pre-commitment and self-control |
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| "Prospect theory in the wild: Evidence from the field" shows 10 examples: in finance-- equity premium (loss aversion) and selling winners and holding losers (disposition/reflection effect), cab drivers' labor supply (loss aversion), asymmetric price elasticities of consumer goods (loss aversion), insensitivity to bad news re: savings and consumption (loss aversion and reflection effects), health insurance and being given mugs (status quo bias, endowment effects, buying-selling price caps --> loss aversion), racetrack betting--favorite longshot bias (overweighting low probabilities) and end of the day effect (reflection effect, state lotteries (overweighting low probabilities), telephone wire repair insurance (overweighting low probabilities) |
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| declining marginal utility of gains |
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Definition
| pleasure of gaining $1 million not that different from pleasure in gaining $500,000--non-linear relationship between quantitative value and utility |
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Definition
| we like certainty, so downward shift in probability is more upsetting when the original probability was a sure thing |
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ownership of an object leads you to demand far more to sell it than most people would be to pay for it
ex. people don't value having a free mug, they just value giving it up |
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| money is not fungible--we keep money in different mental accounts |
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in some situations of uncertainty, people will eventually opt for same course of action but for very different reasons depending on how uncertainty is resolved
ex. student going on vacation after hearing if they passed/failed the exam |
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Definition
way of evaluating joint outcomes to maximize utility
i.e. thinking of receiving 10 $100 bills instead of a $1000 lump sum
1. segregate gains
2. integrate losses
3. integrate smaller losses with larger gains
4. segregate small gains from larger losses |
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Definition
effortless, intuitive, automatic, implicit, emotional
fast to learn, hard to unlearn |
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reasoning, slow, conscious, effortful, explicit, logical
computations and careful thoughts can be wrong, both factually and logically |
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| posterior odds = prior odds * likelihood ratio |
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thinking that the regression effect must be due to something important, not just the spread around the mean
people think past performance will dictate future success--mostly false due to regression effect |
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assess frequency, probability, or likely causes of an event based on the degree to which instances or occurrences of that event are readily "available" in memory
relates in a way to affect heuristic--emotional and vivid imaginings or events more readily "available" |
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| representativeness heuristic |
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Definition
| look for traits that correspond with previously formed stereotypes, comparing current judgment with past judgments |
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conjunction of two or more things will be judged more likely than each thing occurring separately, which is nearly impossible
i.e. Linda the feminist bank teller
emanates out of representativeness heuristic |
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Definition
insensitivity to sample size, easier for anomalous statistics to come from small sample size than out of large
emanates out of representativeness heuristic |
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| positive hypothesis testing/confirmation bias heuristic |
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Definition
| use select data, overlooks full analysis |
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Definition
willingness to attempt to falsify hypotheses and thus test intuitive ideas that carry feelings of certitude
linked to ease of retrievability in memory
emanates from positive hypothesis testing/confirmation heuristic |
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Definition
pay attention to irrelevant "anchors" when making estimates because
i.e. guess the year x happened after thinking about the last four digits of your SSN
emanates from positive hypothesis testing/confirmation heuristic |
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Term
| conjunctive- and disjunctive- events bias |
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Definition
overestimate likelihood of multiple events all occurring and underestimate likelihood of one event occurring
emanates from positive hypothesis testing/confirmation heuristic |
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| hindsight bias/"curse of knowledge" |
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Definition
easier to find the supporting rather than detracting evidence in hindsight
emanates from positive hypothesis testing/confirmation heuristic |
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Definition
| judgments evoked by affective, or emotional valuation that occurs before any higher-level reasoning takes places |
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Definition
prevents us from focusing on useful, observable, and relevant data
distinct from availability--a focusing failure
inattentional blindness, change blindness |
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| focalism/focusing illusion |
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Definition
common tendency to focus too much on a particular event and too little on other concurrent events
or overestimate impact of focal event on happiness |
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Definition
money is money--money here is always a perfect substitute for money there
an economic principle violated by mental accounting and psychology |
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| Ariely, Loewenstein, and Prelec (2006) |
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Definition
"Tom Sawyer and the construction of value"
people's perceptions of value are completely malleable
"In order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to obtain."--Mark Twain
Experiment: students asked if they would pay or be paid to listen to a poetry reading had very different ideas of the desirability of attending the reading |
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Term
| Shafir, Simonson, and Tversky (1993) |
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Definition
"Reason-based choice." In opposition to value-based theories of choice.
We often seek and construct reasons to justify choice and resolve conflict. |
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Term
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Definition
"Can Evolution Explain How The Mind Works? A Review of the Evolutionary Psychology Debate."
mental organs have psychologically and evolutionarily adapted--i.e. we've developed cheater detection out of survival of the fittest
critique: what if the mental trait is developed by societal influences, not biological? |
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Term
| Save More Tomorrow (SMarT) program |
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Definition
retirement plan in which participants lock themselves into savings increases with pay raises
described in Thaler and Sunstein, plan based on 5 principles
1. people all want to save more, just don't follow through
2. self-control restrictions easier to adopt if they take place in the future
3. loss aversion (don't want to see paycheck go down)
4. money illusion (losses felt i nominal, not inflation-adjusted dollar)
5. power of inertia
channel factors matter, participation rates depend on how easy it is |
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Term
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Definition
| retirement plans like Social Security and traditional retirement plans which are mindless (which is helpful) but expensive for employers and not very portable (between jobs) for employees |
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Term
| defined contribution plans |
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Definition
retirement plans like 401(k)s, more common now but worse choice architecture in that individuals have to opt in, set their own savings and spending rates, and manage portfolio
only 30% of eligible enrollees actually do so |
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Definition
two different aspects
ex. of kids choosing one of each candy bar at the same house but when offered the choice of one candy bar at different houses, will always choose the same candy bar
1/n heuristic--when faced with n options, decision-makers divide assets evenly across the options |
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Term
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Definition
people don't make decisions based on the rational economic model
people respond sensibly to changes in conditions, even if they do so from arbitrary baselines
decisions influenced by arbitrary factors |
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Term
| Tooby and Cosmides described in Mitchell (1999) |
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Definition
researchers who challenged the SSSM and asserted that evolution does play a role in our psychology
three assumptions
1- mind is a specialized mental organ
2-natural selection, mental organs formed via slow accumulation of genetic variations
3- this accumulation occurred during Pleistocene epoch, 1-2 million years ago |
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Definition
| "Self-command in practice, in policy, and in a theory of rational choice." |
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