DECISION MAKING
Decision: a choice between available alternatives.
Decision making: the process of developing and analyzing alternatives and choosing from
among them
Judgment: the cognitive, or “thinking”, aspects of the decision-making process
Decision making process
Trial and error decision making
Strategy: predict an outcome, choose the best, learn from experience to improve
predictions, use experience in a cost-effective way minimize effort/time
Framework for studying decision-making
Neuroscience/neuroeconomics
- Neural correlates of subjective value
- Value comparison and integration
- Perceptual decision-making
Psychology
- social decision-making
- Biases and heuristics
Philosophy
- Unconscious decision-making
- Free will (&addiction)
Are our decisions rational?
Models of rational choice view the mind as if it were a ‘supernatural being’ possessing
‘powers of reason’, ‘boundless knowledge’, and ‘all of eternity’ with which to make
decisions
Humans make inferences about their world with limited time, knowledge, and
computational power.
Satisficing: we show bounded rationality – we are rational, but within limits (Simos, 1957)
, The subjective assessment of most real quantities has to rely on incomplete data of limited
validity, Tversky and Kahneman 1974
- The mind has to resort to heuristic that afford useful proxies most of time
- These heuristics are economical and usually effective, but they lead to systematic
and predictable errors in certain situations
- Heuristics = mental shortcuts that lighten the cognitive load of making decisions
Bounded rationality (Simon 1957): the idea that decision making deviated from rationality
due to human limitations in cognition capability
Availability heuristic
Field of application: memory-based judgments of frequency or probability
Example: overestimation of risks that are easily available in memory
Karlsson, Loewenstein and Ariely (2008) showed that people are more likely to purchase
insurance to protect themselves after a natural disaster they have just experienced than
they are to purchase insurance on this type of disaster before it happens.
Why?
- Kahnman: we tend to assess the relative importance of issue by the ease with which
they are retrieved from memory – and this is largely determined by the extent of
coverage in the media.
- We often lack the time/resources to investigate in during decision making. The
availability heuristic is a useful way to quickly arrive at conclusions.
- ‘If I can remember it easily, it must be important’ ‘ however, if we rely on faulty
estimates of the probability of an event, our perceptions of risk and error may be
skewed and lead us to focus on the wrong risks or ignore the important ones.
Anchoring and adjustment
Field of application: when we make judgments under uncertainty we use this heuristic by
starting with a certain reference point (anchor) and then adjust it insufficiently to reach a
final conclusion
Example: if you have to judge another person’s productivity the anchor for your final
(adjusted) judgment may be your own level of productivity
- Anchoring is the tendency to rely on initial information to ‘anchor’ subsequent
judgements
- Once the anchor is set, we are biased towards interpreting information around the
anchor, even if we eventually discover the anchor to be incorrect or less relevant
than the new information
- If we are unable to re-anchor, the initial anchor will prevent us from making fully
rational decisions based on an unbiased analysis
Conjunction fallacy
2
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