Decision

Decision Summary Search for alternatives Descriptive, normative, prescriptive Expected Utility: normative theory of decision Psychology of decision Prospect theory: descriptive theory of decision Thinking map: prescription for deciding

Decision Search for alternatives Impossible to decide without alternatives. It is crucial to search for alternatives

Decision: Search Example: Herpes vaccine We should vaccinate young girls against Herpes because this virus is a major cause of cervical cancer in women, and it is important that girls be vaccinated before initiating sexual activity. Government should pay for the vaccines and make vaccination mandatory for schoolgirls…

Decision: Search Example: Herpes vaccine We should vaccinate young girls against Herpes because this virus is a major cause of cervical cancer in women, and it is important that girls be vaccinated before initiating sexual activity. Government should pay for the vaccines and make vaccination mandatory for schoolgirls… No decision (no alternatives considered)

Decision: Search Example: Herpes vaccine Sexual behaviour of minors is always a problematic issue, so while preventing Herpes infections is an important goal, we should consider possible consequences and different alternatives. Whether to vaccinate only girls, vaccinate both girls and boys, make vaccination optional but always available if the minor chooses to be vaccinated

Decision: Search Example: Herpes vaccine Sexual behaviour of minors is always a problematic issue, so while preventing Herpes infections is an important goal, we should consider possible consequences and different alternatives. Whether to vaccinate only girls, vaccinate both girls and boys, make vaccination optional but always available if the minor chooses to be vaccinated Alternatives considered: Only girls Boys and girls Mandatory or optional

Considering Alternatives It is always important to consider alternatives To form and evaluate arguments To evaluate claims To design experiments and test models To decide

Theories (Theory in the sense of a set of propositions or recommendations) Descriptive What is Normative What is better Prescriptive What to do

Theories Example: Shopping for groceries

Theories Descriptive: prices, products, supermarkets…

Theories Example: Shopping for groceries Descriptive: prices, products, supermarkets… Normative: a better deal is less $$, more, quality…

Theories Example: Shopping for groceries Descriptive: prices, products, supermarkets… Normative: a better deal is less $$, more, quality… Prescriptive: 1º LIDL; 2º Feira Nova for the rest

Expected Utility Normative theory of decision Utility in a broad sense (“goodness”)

Premises of Expected Utility Values are relative -How is your wife? -Compared to what?

Premises of Expected Utility Weak (partial) ordering. Either prefers A to B, prefers B to A, or indifferent Transitive: if prefers A to B and B to C, prefers A to C

Premises of Expected Utility Weak (partial) ordering. Sure thing principle 1%99% Game XCarCrackers Game YLuxury CruiseCrackers Ignore crackers when picking game

Expected Utility Weak (partial) ordering. Sure thing Implies that: E.U. =  p i x u i Expected utility is the sum of the utilities of outcomes multiplied by their probabilities

Expected Utility Example: Lottery :50,000€ with 1/100,000 probability. Expected utility = 50,000/100, *(-20)= -19.5€ (is utility equal to monetary value?...)

Psychology of Decision

Thinking: one-sided versus two-sided

Psychology of Decision Thinking: one-sided versus two-sided Favouring one-sided thinking: Reluctance to change one’s mind Mimicking experts (experts know) Confusing decision with advocacy

Psychology of Decision Thinking: Self deception

Psychology of Decision Thinking: Self deception Quattrone and Tversky, 1984 Test the tolerance of a subject to pain (from cold)

Psychology of Decision Thinking: Self deception Quattrone and Tversky, 1984 Tell subjects there are two types of heart: Less heart attacks tolerance varies with exercise More heart attacks, no difference

Psychology of Decision Thinking: Self deception Quattrone and Tversky, 1984 Repeat test after exercise. In most cases tolerance shifted towards «good heart».

Psychology of Decision Thinking: Self deception Most drivers believe they are better than average Most people believe to have better than average chances of reaching 80

Psychology of Decision Thinking: Belief overkill People opposed to nuclear tests believe them to be a medical danger, source of instability, and not lead to improvements. People in favour believed the opposite.

Psychology of Decision Thinking: Belief overkill People opposed to death penalty believe not to be deterrent and morally wrong People in favour believed it to be a deterrent and morally acceptable.

Psychology of Decision Bernoulli, St. Petersburg Paradox: Flip coin until it lands “heads”. Pays 1€ if on first throw, 2€ on second, 4€ on third…

Psychology of Decision Bernoulli, St. Petersburg Paradox: Flip coin until it lands “heads”. Pays 1€ if on first throw, 2€ on second, 4€ on third… Expected: ½ * 1+ ¼ * 2 + 1/8 * 4 +… = ½ + ½ + ½ + … = 

Psychology of Decision Bernoulli, St. Petersburg Paradox: With infinite expected return anyone should pay anything to play this game. Why don’t they?

Psychology of Decision Bernoulli, St. Petersburg Paradox: Utility is a log function of value?

Psychology of Decision Framing: Game 1: 25% chance of winning level. Must choose prize: A: 100% 30€B: 80% 45€

Psychology of Decision Framing: Game 1: 25% chance of winning level. Must choose prize: A: 100% 30€B: 80% 45€ Game 2: A: 25% 30€B: 20% 45€

Psychology of Decision Allais Paradox (sure thing) Situation X: 1: 100% 1k€2:89% 1k€ 10% 5k€ 1% 0€ Situation Y: 3: 11% 1k€ 89% 0€4:10% 5k€ 90% 0€

Psychology of Decision Allais Paradox (sure thing) Situation X: 1: 100% 1k€2:89% 1k€ 10% 5k€ 1% 0€ Situation Y: 3: 11% 1k€ 89% 0€4:10% 5k€ 90% 0€

Psychology of Decision Allais Paradox (sure thing) Equivalent to: Situation X: 1:1k€1k€1k€ 2:0€5k€1k€ Situation Y: 3:1k€1k€0€ 4:0€5k€0€

Prospect Theory Kahneman, Tversky, 1979

Prospect Theory Probability: , not p (certainty effect)

Prospect Theory Probability: , not p Allais paradox Game 30€ or 45€

Prospect Theory Utility not linear:

Prospect Theory Framing effects: Gas 0.95€ Card Surcharge 0.05€ Gas 1.00€ Cash discount 0.05€

Prospect Theory Framing effects: Outbreak expected to Kill 600. A: Save 200 B: Save 600, p=33%

Prospect Theory Framing effects: Outbreak expected to Kill 600. A: 400 die B: 600 die, p=67%

Prescriptive: Thinking Map 1. Necessity. Objectives. 2. Recommendations? 3. Options/Alternatives. 4. Consequences: Likelihood and Importance 5. Compare the alternatives. 6. Feasibility and contingency plans. 7. Check the cost of deciding.

Prescriptive: Thinking Map 1. Necessity. Objectives. 2. Recommendations? Keep in mind the objectives. Look for previous solutions or recommended actions.

Prescriptive: Thinking Map 3. Options/Alternatives. 4. Consequences: Likelihood and Importance Decision is a search process. Consider different alternatives. Check if you have enough information to estimate consequences and likely outcomes. Avoid single-mindedness…

Prescriptive: Thinking Map 1. Feasibility and contingency plans. Can we implement it? What if things go wrong? 2. Check the cost of deciding. Decision requires information. Certainty comes at a price.

Decision Alec Fisher, Critical Thinking Chapter 11 Chapter 11