1. Psych 335 Decision Making

2. Issues How do we decide between a number of alternatives? Big issues Day-to-day issues Eliminating all aspects Decision trees

3. Making decisions: considering Big Issues Tversky: choosing between a senior fellowship at Stanford or Harvard Considers the big issues: –PrestigeCould weight each of these considerations by relative importance and rate each school to get an overall score.

4. Making decisions: considering Day-To-Day Issues Tversky: choosing between a senior fellowship at Stanford or Harvard Considers the day-to-day issues: –Living in Boston vs. Palo Alto –Rainy and cold vs. sunny –Could walk to campus at Stanford Conclusion: Big issues are important, but it’s the day-to-day things that can wear you down and make life unpleasant even if the position is better.

5. Making decisions: Eliminating all alternatives Like a job search Weigh all candidates or options together, eliminate worst until you have a small group Then get more information about small group Make selection based on subset

6. Making decisions: Binary Decision Tree Like the college basketball tournament This eliminates the problem of being overwhelmed with lots of different choices Problems with this approach –It guaranties(are the Bills the second-best team in the NFL?) –Process may not be transitive: if A > B and B > C, will A always beat C? Not always.

7. Making decisions: Cognitive Aspects Often times just making a decision will help Once you get used to the idea of that decision, you may begin to like it more. Or you may recoil in horror at the thought of doing that, and choose the other alternative. Once you’ve made a decision, you may begin to tell yourself unconsciously

8. Psychology of Preferences: Daniel Kahneman and Amos Tversky Suppose you were on the way to a play that cost $40 for tickets You discover you had lost the tickets. Would you pay another $40 for tickets (that you have with you)? Now suppose you were on your way to the play, but you hadn’t bought tickets yet. You discover on the way that you had lost $40 that you had set aside for tickets. Would you pay another $40 for tickets (that you have with you)?

9. Psychology of Preferences: Daniel Kahneman and Amos Tversky In each case the outcome is the same: in order to see the play you are going to have to pay $40. People differ in their responses however. They are attributing the money for new tickets to different accounts –$80 for tickets seems high –Another $40 taken out of a checking account with $1500 in it doesn’t seem that bad.

10. Psychology of Preferences: Daniel Kahneman and Amos Tversky Would you rather take a certain $80 or have a 85% chance of winning $100 and a 15% chance of getting nothing? Most people take the $80 despite the fact that the monetary expectation is higher for the gamble- risk averse. Would you rather take a certain $80 loss or have a 85% chance of losing $100 and a 15% chance of losing nothing? Most people take the gamble despite the fact that the monetary expectation is higher for the sure loss- risk seeking.

11. Psychology of Preferences: Daniel Kahneman and Amos Tversky People identify consequences as gains or losses relative to a neutral point Choose a risk-averse strategy when thinking about gains Gives a concave value function: –Gains on x-axis –subjective value on y-axis –function plots relationship between gains and subjective value –Use the function to determine value of sure gain, and compar that to the value of the gamble (.85 * $100).

12. Psychology of Preferences: Daniel Kahneman and Amos Tversky The winning lottery ticket is 873534 in a game with only one winner. John has 396454. Mary has 384356. Sue has 873533. Who is more upset? Why?

13. Psychology of Regret: Daniel Kahneman and Amos Tversky You are driving to the airport. You are late, but you don’t run a red light that later you wish you would have. You miss your plane by 5 minutes. You are driving to the airport. You have trouble finishing packing, and you arrive at the airport late. You miss your plane by 30 minutes. Which situation generates more regret? Depends somewhat on the avalability of “alternative worlds”

14. Psychology of Regret: Daniel Kahneman and Amos Tversky Paul owns shares in company A. He considers switching to shares of company B, but doesn’t. He finds out at the end of the year that he could have made $1200 by switching to company B. George owns shares in company B. He switches to company A. He finds out at the end of the year that he could have made $1200 if he had stayed with company B. Who has more regret?

15. Psychology of Regret: Daniel Kahneman and Amos Tversky Both men lost the ability to make $1200, and both own shares in company A. Why does George feel more regret? Easier for George to imagine not taking an action (switching) than it would be for Paul to imagine taking the action. Anticipation of regret favors inaction over action and routine behavior over innovative behavior. Depends again on how alternative realities are constructed.