Lecture 3: Decision Making Under Risk and Uncertainty

For our third lecture (week 4) we were asked to read The Priority Heuristic: Making Choices without Trade-Offs, by Brandstatter, Gigerenzer and Hertwig. Also to read Chapter 7 of Introduction to Judgment and decision making (JDMPP) to re familiarise ourselves with the theories of risky and uncertain decision making. Including the expected value theory, expected utility theory, and the Prospect theory. I found this reading useful as i had little memory of this subject!
Expected value theory states that a decision maker (DM) will assign a value to each attribute and they will choose that action with the highest expected value (i.e. highest monetary outcome). However this theory conflicts with peoples intuitions (see St Petersburg paradox). The expected utility theory takes peoples personal choices into account and looks at how a DM makes a choice between two or more risky or uncertain outcomes by comparing expected utility values (or subjective values) of the outcomes and multiplying them by their respective probabilities.
This theory has been highly criticized on three major points:
These theories argue that the DM is risk averse, in that they will avoid risky decisions because a loss looms harder than potential gain. However this risk aversion idea is not supported when outcomes are not sure things i.e. people will risk-seek when outcomes are both losses.
They state that a DM will always try to maximise their utility. However the Allais Paradox proves that this is not the case! It shows that when a problem is worded differently the DM will choose a route with a certain gain even if it is not the option with the largest outcome.
Lastly, the isolation effect: The theory assumes that people integrate possible outcomes with their current assets. Again this has been proven to be untrue, for example people will not always take into account money they get given before a task.
In the reading there were examples of these, and I even found that I would choose a certain outcome over an uncertain outcome, even if the uncertain outcome had a higher expected value! I think this is because if I chose the certain outcome I did not have to worry about the prospect of leaving the situation with nothing when there was a chance of winning some money.
Then came the prospect theory to combat these failures.. This theory accounts for the fact that a gain can be seen as a loss if you don’t gain as much as you expect to win. I can relate to this as when I received a payslip over the summer it was not as high as I expected it to be, the money I had earned therefore seemed like a bit of a letdown rather than a gain!
It also accounts for the impact of small probabilities. People overestimate small probabilities and underestimate large probabilities. For example lots of people -including myself- buy lottery tickets the expected value of a lottery ticket is very low as is its probability of winning however people still carry on buying them week after week.
I found the reading on priority heuristics a little hard going at times but I think I understood the overall gist of the article. The theory is similar to the take the best algorithm in that the DM will base their choice on 1 reason without looking at all the probabilities, just the outcomes. There are also 3 rules the DM must follow to make their choice. I do find this theory believable as it explains why we choose certainly over uncertainly because we don’t look at all the probabilities. Also in real life it is often impossible to work out all the probabilities of outcomes especially when we don’t have much time to make a choice!
During the lecture we were set a task to fill in two questionnaires. The were two different methods of measuring a person utility. The two graphs at the top of the page show my utility of certain monetary values for each method. Monetary values are on the x axis and utility values are on the y axis.

The first method was the certainty probability method. I was asked questions to test my utility, like if i was offered a lottery ticket with a 50% chance of getting £1000 and a 50% chance of getting £0 or getting a certain sum of money, how much would the certain sum of money have to be to make me indifferent between the two. to this particular question i answered £200 (my utility of 200 is therefore 0.5 because it was a 50% chance of getting all the money: £1000 or £0).

Then, the second set of questions was the probability method. This method should come up with the same graph as the first set because the questions were the same just framed differently . An example is: if i had the £200 for certain or a lottery of £1000 and £0, what probability of winning £1000 would make me indifferent between the two? I answered 80%.

As you can see the graphs are similar but not exactly the same! My utility for the £50 is a lot lower in the certainty equivalence method. This could be an example of the framing effect, that changing wording of a description of a decision can affect our preferences of decision. I did find it hard to give a totally honest answer because it was a made up scenario and not real life. I also found thinking in terms of probability was difficult. However they both curve showing that in both instances i was risk averse!

Second Lecture (week 3)

I am writing a couple of days after my second lecture, because of the strike we had no lecture in the second week. Instead we did the reading (Reasoning the fast and frugal Way: Models of bounded Rationality by G, Gigerenzer and D,G, Goldstein), and in class we discussed it in our groups then summarized it to the class.

The article firstly looks at the different theories of how humans and other species make inferences about unknown aspects of the environment. It begins with the classical view that the judgements and decisions we make are merely laws of probability and statistics, not a lot of logic. It argues that the mind uses quick, simple processes or algorithms as a tool to makes inferences about the world. This enlightenment view was highly criticized for being too simple and unrealistic. Even for treating the mind as a 'laplacean demon' or a super calculator, because it looks at all available information.

The article we read argued that we make judgements just based on on cue rather than looking at all available knowledge (take the best ignore the rest!). For example if the question was asked: which is the biggest city A) or B) and the participant knows A has a university and B does not then they will pick A to be the biggest city, rather than looking at all the cues available (the classical view). Above is a flow chart of this process. Test results backed up this take the best theory showing that it was just as accurate as the other theories and can be preformed in a quicker time.

I am unsure were i stand in this debate on reasoning. I think that obviously we often make snap decisions and judgements which don't require much thinking or processing of information. However i know from my experience i often take a long time to make a decision and do take the time to think about more than just one cue, these sorts of decisions cannot be as simple as these theories suggest. However when we are put into a situation where we have to make a very fast decision i can see that we may base it on just one cue.

At first i found the article a little hard going as there was a lot of information to take in and it was quite long. It took me along time to read and i was worried i had not fully grasped the over all concept. However, when we got into groups in class it was really helpful to discuss it, i was able to fill in some of the gaps and see what every one else made of it. At the end we did a small presentation on one part of the paper. It went okay, but although i had it clear in my head, it was hard to put it across in the correct words and explain it to those who had not read the article. I think with practice this will become easier. After our presentation the other groups talked about their papers on how judges and professionals make fast judgements, and whether they look at all the information or base decisions on what they believe is one most important cue. It was interesting because one would think that judges are very fair and take all information into account but it would seem that sometimes they do not.

Next weeks reading is on priority heuristics and making choices without trade-offs. I plan to start this on Monday so I'll see how i get on with that.

(Diagram reprinted by permission of the American Psychological Association).

Judgement First Lecture

This is my first entry and was surprised how easy it is to set up!
I am in my final year and one of my three modules this semester is judgement and decision making. My first lecture for this was last Friday. My first impression of the module was that i liked the way it was assessed. Rather than doing essays and exams it’s comprised of reading, group work and participation in class which I think I will prefer. Although sometimes I have to really push myself to participate, i think it will be very good practise and help me become more confident.

I did the reading for the first lecture (Hardman 2009)chapters 1 and 2, which was on judgement and decision making which I found quite interesting, looking at conscious and unconscious decisions and the dual system. I also found rationality interesting, which is adhrence to a normative model, or behaving in a 'normal' way in a given situation. Some say this is learnt by gaining experience in a certain domain. However ther is evidence of irrational behaviour in people who are experienced in a domain. An example of this is visual illusions, take the illusion in the top left hand corner, (the online optical illusion of Muller-Lyer). even when you are told that both the horizontal lines are equall you still see them as the same length! A further example of irrational judgements is when people do not focus on immediate concerns, for example, not saving for a pension or smoking and drinking heavily when you are young. I can see how this is very true to everyday life as i often do not think about future consequences when i am 'in the moment' eg, spending all my money in one shopping trip!

We had a discussion about that and other approaches to understanding why we make decisions and also what exactly a good decision is. Then we formed groups. I am glad we get to work in groups instead of alone, this way we can discuss the reading between ourselves before we present it to the class so it’s clear in our minds!

I am in the process of doing the reading for the next lecture, reasoning the fast and frugal way by Gigerenzer and Goldstein. This reading is taking me along time to take it all in but its still very interesting. Then I will get in touch with my group to discuss. As we don't have a lecture next week because of the strike in our groups we will still do written work on "wiki", and discuss the reading on fast and frugal reasoning in class.

Above i have posted a picture of David's book Judgement and Desision Making (Hardman 2009). I plan to buy it as it is essentail reading in this module. Hopefully i can get it from amazon! i will write an update before my next lecture on how the reading has gone.
Alice.

references:
Hardman, D.(2009). Judgment and Decision Making: Psychological Perspectives. Chichester, UK: BPS-Blackwell.