Human decision making
Lecture 1 – General decision making
People are fairly well able to make complex decisions, yet are sometimes
struggling with simple decisions
- Intelligence does not make a difference
- Awareness of biases does not really help
Decision: moment in an ongoing process of evaluating alternatives for meeting
an objective.
Decision making: entire process, including judgement and evaluation
- Judgement: preparation for making a decision
- Problem solving: focus on decision as a solution
Decision making process
1. Define problem
o Identifying, defining and understanding
o Goal of the decision
2. Identify criteria
o Multiple objectives
3. Weigh criteria
o Relative value
4. Generate alternatives
5. Rate alternatives on criteria
o Forecasting consequences
6. Compute optimal decision
o Multiplying ratings by weight, adding up weighted ratings across all
criteria for each alternative, choose alternative with highest score
Decision making tool
Phases decision making process
- Judgement and evaluation
- Action (choosing or deciding)
, - Implementation
- Evaluation
For important decisions, this process could be useful, but not for simple decisions.
System 1 and system 2 thinking.
Rationality: how a decision should be made – prescriptive models
Reality: how a decision is made – descriptive models
Behavioural economics
- Economics
o Assumptions about human behaviour
o Aggregated behaviour
o Normative theory
o Deviations from theory
- Psychology
o Research about human behaviour
o Individual behavior
o Descriptive theory
o Separate theories for deviations
Satisficing: accepting a solution that is good enough instead of examining all
possible alternatives
Improving decision making
1. Unfreeze existing decision making process
2. Provide necessary information for promoting change
3. Refreeze new decision making process
Maximizing Versus Satisficing: Happiness Is a Matter of
Choice (Schwartz)
Rational choice theory assumes that humans are rational choosers who aim to
maximize their utility by weighing all available information to find the absolute
best option. However, the authors introduce a different approach based on the
work of Herbert Simon:
- Maximizers: individuals who always strive to make the best possible
choice. They feel compelled to examine every single alternative before
deciding and accept nothing less than ‘the best’.
- Satisficers: individuals who look for an option that is ‘good enough’. They
have a threshold of acceptability; once an option meets that threshold they
stop searching and make the choice
The central theme of the research is that while increased choice is often seen as
a benefit, it can become a ‘mixed blessing’. For maximizers, a proliferation of
options creates tree distinct problems:
- Information overload: it becomes physically and cognitively impossible
to examine all alternatives as the number of choices grows.
- Rising standards: as options expand, people’s expectations for what
constitutes an acceptable outcome rise.
, - Self-blame: in a world of infinite options, any failure to find the perfect
result is seen as a personal failure rather than a limitation of the
environment.
Key findings
- Negative correlations: high maximization scores were significantly
linked to lower levels of happiness, optimisms, self-esteem and life
satisfaction
- Positive correlations: maximizers were much more likely to report
symptoms of depression, perfectionism and regret
- Maximizing vs perfectionism: while related, they are distinct;
perfectionists have high standards, but maximizing is specifically tied to
the exhaustive comparison of options and is more strongly linked to
unhappiness
- Trait stability: preliminary data suggest that the tendency to maximize is
a stable personality trait over time
A crucial discovery was that regret plays a major role in why maximizers are less
happy. Maximizers are more sensitive to both experience and anticipated regret
because they constantly ask themselves: ‘is this the best outcome?’ rather than
‘is this a good outcome?’. The negative effects of maximizing on depression and
happiness are partially explained by this heightened sensitivity to regret.
Lecture 2 – Framing and reference eff ects
Expected value versus expected utility
- Select alternative with highest expected value: strategy that, on average,
provides the best outcome optimal decisions
- However, uncertainty, diminishing marginal utility and risk preferences
play a role as well
- So select alternative with highest expected utility: weighted sum of the
utilities of outcomes multiplied by their probabilities
- People are risk averse for gains
- People are risk seeking for losses
Framing: alternative wordings of the same objective information that
significantly alter the decisions that people make, even though differences
between frames should have no effect on the rational decision
, - Outcomes are evaluated relative to a neutral reference point
o Location of reference point is critical
- Sequential (instead of simultaneous) decisions increase inconsistency and
non-rational choices
o Preference reversals
- Use expected vale as a simple and effective strategy
- Reserve deviations from risk neutrality for important decisions
Types of framing
- Gain/loss
o Positive/negative
o Advantages/disadvantages
o Costs/benefits
- Promotion/prevention
- Abstract/concrete
- Why/how
- Self/other
Prospect theory: descriptive theory about risky decision making
- Diminishing marginal utility
- Prospect theory graph
Characteristics of prospect theory
- Reference point
o Psychological, status quo is often seen as zero
o Perceived gains vs losses
- Reflection effect
o Risk aversion for gains, risk seeking for losses
Lecture 1 – General decision making
People are fairly well able to make complex decisions, yet are sometimes
struggling with simple decisions
- Intelligence does not make a difference
- Awareness of biases does not really help
Decision: moment in an ongoing process of evaluating alternatives for meeting
an objective.
Decision making: entire process, including judgement and evaluation
- Judgement: preparation for making a decision
- Problem solving: focus on decision as a solution
Decision making process
1. Define problem
o Identifying, defining and understanding
o Goal of the decision
2. Identify criteria
o Multiple objectives
3. Weigh criteria
o Relative value
4. Generate alternatives
5. Rate alternatives on criteria
o Forecasting consequences
6. Compute optimal decision
o Multiplying ratings by weight, adding up weighted ratings across all
criteria for each alternative, choose alternative with highest score
Decision making tool
Phases decision making process
- Judgement and evaluation
- Action (choosing or deciding)
, - Implementation
- Evaluation
For important decisions, this process could be useful, but not for simple decisions.
System 1 and system 2 thinking.
Rationality: how a decision should be made – prescriptive models
Reality: how a decision is made – descriptive models
Behavioural economics
- Economics
o Assumptions about human behaviour
o Aggregated behaviour
o Normative theory
o Deviations from theory
- Psychology
o Research about human behaviour
o Individual behavior
o Descriptive theory
o Separate theories for deviations
Satisficing: accepting a solution that is good enough instead of examining all
possible alternatives
Improving decision making
1. Unfreeze existing decision making process
2. Provide necessary information for promoting change
3. Refreeze new decision making process
Maximizing Versus Satisficing: Happiness Is a Matter of
Choice (Schwartz)
Rational choice theory assumes that humans are rational choosers who aim to
maximize their utility by weighing all available information to find the absolute
best option. However, the authors introduce a different approach based on the
work of Herbert Simon:
- Maximizers: individuals who always strive to make the best possible
choice. They feel compelled to examine every single alternative before
deciding and accept nothing less than ‘the best’.
- Satisficers: individuals who look for an option that is ‘good enough’. They
have a threshold of acceptability; once an option meets that threshold they
stop searching and make the choice
The central theme of the research is that while increased choice is often seen as
a benefit, it can become a ‘mixed blessing’. For maximizers, a proliferation of
options creates tree distinct problems:
- Information overload: it becomes physically and cognitively impossible
to examine all alternatives as the number of choices grows.
- Rising standards: as options expand, people’s expectations for what
constitutes an acceptable outcome rise.
, - Self-blame: in a world of infinite options, any failure to find the perfect
result is seen as a personal failure rather than a limitation of the
environment.
Key findings
- Negative correlations: high maximization scores were significantly
linked to lower levels of happiness, optimisms, self-esteem and life
satisfaction
- Positive correlations: maximizers were much more likely to report
symptoms of depression, perfectionism and regret
- Maximizing vs perfectionism: while related, they are distinct;
perfectionists have high standards, but maximizing is specifically tied to
the exhaustive comparison of options and is more strongly linked to
unhappiness
- Trait stability: preliminary data suggest that the tendency to maximize is
a stable personality trait over time
A crucial discovery was that regret plays a major role in why maximizers are less
happy. Maximizers are more sensitive to both experience and anticipated regret
because they constantly ask themselves: ‘is this the best outcome?’ rather than
‘is this a good outcome?’. The negative effects of maximizing on depression and
happiness are partially explained by this heightened sensitivity to regret.
Lecture 2 – Framing and reference eff ects
Expected value versus expected utility
- Select alternative with highest expected value: strategy that, on average,
provides the best outcome optimal decisions
- However, uncertainty, diminishing marginal utility and risk preferences
play a role as well
- So select alternative with highest expected utility: weighted sum of the
utilities of outcomes multiplied by their probabilities
- People are risk averse for gains
- People are risk seeking for losses
Framing: alternative wordings of the same objective information that
significantly alter the decisions that people make, even though differences
between frames should have no effect on the rational decision
, - Outcomes are evaluated relative to a neutral reference point
o Location of reference point is critical
- Sequential (instead of simultaneous) decisions increase inconsistency and
non-rational choices
o Preference reversals
- Use expected vale as a simple and effective strategy
- Reserve deviations from risk neutrality for important decisions
Types of framing
- Gain/loss
o Positive/negative
o Advantages/disadvantages
o Costs/benefits
- Promotion/prevention
- Abstract/concrete
- Why/how
- Self/other
Prospect theory: descriptive theory about risky decision making
- Diminishing marginal utility
- Prospect theory graph
Characteristics of prospect theory
- Reference point
o Psychological, status quo is often seen as zero
o Perceived gains vs losses
- Reflection effect
o Risk aversion for gains, risk seeking for losses
