Summary Rational Thinking and Decision Making (lecture notes + papers)
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Course
Rational Thinking and Decision Making (422056B6)
Institution
Tilburg University (UVT)
This summary includes a summary on all the required readings and a summary of all the lecture slides, explaining all the important therms and theories.
RATIONAL THINKING
AND DECISION-MAKING
College 2
Baron, J. (2014). Heuristics and biases.
Normative, Descriptive, and Prescriptive Theories:
Normative models set the ideal standard for how judgments and decisions
should be made. Examples include expected utility theory (EU) for decisions
under uncertainty, Bayesian statistics for belief updating based on new
information, and utilitarianism for moral choices.
Descriptive models attempt to explain how people actually think and decide,
taking into account psychological factors.125
Prescriptive models focus on improving decision making, for example by using
decision support systems, training, or the design of the environment ("decision
architecture").
Heuristics are mental shortcuts or rules of thumb that people use to make quick
decisions or judgments, especially under conditions of uncertainty or limited
information. They simplify complex problems and reduce cognitive effort, allowing
individuals to make decisions more efficiently.
Representativeness Heuristic: People judge the probability of an event by how
much it resembles or is representative of a stereotype or a known category, often
ignoring base rates.
Example: Individuals might categorize someone as a computer science
student if their personality matches the stereotype, even when statistically, the
field is small.
Availability Heuristic: Individuals estimate the likelihood or frequency of an
event based on how easily they can recall examples of it. Events that come to
mind quickly, such as those heavily covered in the media, are perceived as more
likely.
Example: People overestimate the likelihood of plane crashes after hearing
about a recent accident on the news
Affect Heuristic: Decisions are influenced by an individual's immediate emotional
response (affect). For instance, people may judge risks or probabilities based on
, their positive or negative feelings toward the subject, rather than objective
evidence.
Example: A person decides to buy a lottery ticket because they feel excited
and optimistic thinking about the possibility of winning, despite knowing the
extremely low odds.
Proportionality Heuristic: People tend to assess risks or decisions in terms of
proportions rather than absolute numbers.
Example: People focus on the proportion of lives saved rather than the total
number of lives saved.
Anchoring: People rely too heavily on the first piece of information (the "anchor")
when making decisions.
Example: In a restaurant, the first dish on the menu is a lobster dinner priced
at $50. When you see a steak priced at $30, the high price of the lobster
serves as an anchor, making the steak seem more reasonably priced, even
though $30 might still be more than you usually spend.
Biases are systematic errors in thinking that affect the decisions and judgments
people make. These errors often result from the misuse of heuristics or flawed
cognitive processes. Biases distort reality and lead to illogical or irrational
conclusions.
My-side bias: This bias occurs when individuals favor their own beliefs,
arguments, or goals, ignoring counterevidence or alternative viewpoints. People
tend to look for and interpret evidence that supports their pre-existing views, often
leading to confirmation bias.
Confirmation bias: Closely related to my-side bias, this bias leads people to
search for, interpret, and remember information in a way that confirms their pre-
existing beliefs, while discounting information that contradicts them.
Overconfidence bias: People tend to be overly confident in the accuracy of their
judgments or decisions, often leading to inappropriate levels of certainty in the
correctness of their beliefs. For example, when asked to reflect on both sides of
an issue, people often show less confidence in extreme positions
Loss aversion: People tend to prefer avoiding losses rather than acquiring
equivalent gains. This concept suggests that losses have a more significant
psychological impact than gains of the same size.
Framing effect: People’s decisions are influenced by how information is
presented, rather than just the information itself. Different presentations of the
same fact can lead to different choices.
Actief open-minded denken (AOT) is een strategie om deze bias te verminderen
door actief te zoeken naar tegenargumenten en alternatieve perspectieven.
Economic Rationality: In economics, rationality typically refers to making
decisions that maximize utility or self-interest. It assumes that individuals have
preferences and make choices that best satisfy these preferences, given
available information and resources.
Example: A person decides to invest in stocks rather than keeping their
money in a savings account because they assess that the expected return
from the stock market is higher in the long run, maximizing their financial gain.
They compare risks and returns and choose the option that maximizes their
utility.
Bounded Rationality: Introduced by Herbert Simon, this concept recognizes that
human decision-making is often limited by cognitive constraints, incomplete
information, and time. Individuals aim for satisfactory solutions rather than the
optimal one, given these limitations.
Example: A person is shopping for a new laptop but has limited time and
knowledge about all available options. Instead of analyzing every single
product in detail, they choose one that meets most of their needs (e.g., price,
battery life, and brand) and decide it's "good enough," even if it might not be
the absolute best option on the market.
Instrumental rationality This type refers to choosing the most effective means to
achieve specific ends or goals. It emphasizes goal-directed behavior and the
ability to assess the best course of action to reach a desired outcome.
Example: A student wants to improve their grades. To achieve this goal, they
create a study schedule, prioritize subjects where they are weak, and practice
regularly. The goal (better grades) drives their behavior, and they choose the
most efficient methods to attain it.
Epistemic rationality relates to the justification and formation of beliefs. It
emphasizes the correctness of beliefs based on evidence, logic, and reasoning.
This form of rationality is concerned with the acquisition and evaluation of
knowledge.
Example: A person believes in a particular scientific theory because it is
supported by empirical evidence. When new, credible research disproves
parts of the theory, they revise their belief accordingly. Their belief system is
based on evidence, and they update it when new, reliable information
emerges.
The Great Rationality Debate refers to an ongoing discussion in cognitive science,
psychology, and philosophy regarding the nature and limits of human rationality. It
, centers on the question of whether human beings are fundamentally rational
decision-makers or whether cognitive biases and heuristics lead to systematic
irrationality. The debate was sparked by empirical studies, especially those by Amos
Tversky and Daniel Kahneman, which showed that people often deviate from the
principles of classical rationality when making decisions under uncertainty. There are
different perspectives in this debate:
Perspective I: The rational actor (1930-1970) This perspective is rooted in
classical economics and rational choice theory, which assumes that individuals are
fully rational decision-makers who:
- Maximize utility: They make decisions that yield the greatest benefit or
satisfaction.
- Act in self-interest: Their decisions are based on personal preferences and
available information.
- Have consistent preferences: They make choices based on logical
reasoning and consistent preferences.
- Perfect information: They are assumed to have access to all relevant
information and can process it accurately.
This leads to the use of expected utility theory in the case of decisions under
uncertainty, and game theory in case of interdependent decision-making.
Expected utility theory: Expected Utility Theory (EUT) explains how rational
individuals make decisions under uncertainty by choosing the option that
maximizes their expected utility. It assumes that people:
1. Assign a utility (value) to each possible outcome.
2. Weigh outcomes based on their probabilities.
3. Choose the option with the highest expected utility, calculated as the sum
of each outcome's utility multiplied by its probability.
Game theory: The study of strategic interactions between individuals or groups,
where the outcome for each participant depends not only on their own decisions
but also on the decisions made by others. It provides mathematical models to
analyze situations where parties (called "players") make decisions that are
interdependent, and where each player's payoff (or utility) is influenced by the
actions of others.
Example: A consumer choosing a product based on its price, quality, and expected
satisfaction, carefully weighing options to maximize value.
Critique: This model often fails to account for real-world complexities, like cognitive
limitations or emotional influences, and does not explain systematic errors in
decision-making.
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