Or Why Weâre Not Really As Rational As Weâd Like to Believe

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Higher Level Cognition. Or Why We’re Not Really As Rational As We’d Like to Believe. Prospect Theory. Kahneman and Tversky: The Value Function The Risk Function Reference Points. Prospect Theory. The Value Function For gains people are risk averse For losses people are Risk Seeking

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Higher Level Cognition

Or

Why We’re Not Really As Rational As We’d Like to Believe

Prospect Theory

• Kahneman and Tversky:
• The Value Function
• The Risk Function
• Reference Points

Prospect Theory

The Value Function

For gains people are risk averse

For losses people are

Risk Seeking

Steeper Curve for losses than for gains.

Framing Effects

Imagine that the United States is preparing for the outbreak of an unusual disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the program are as follows:

If program A is adopted 200 people will be saved

If program B is adopted, there is a 1/3 probability that 600 people will be saved, and a 2/3 probability that no people will be saved.

Framing Effects

Imagine that the United States is preparing for the outbreak of an unusual disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the program are as follows:

If program A is adopted 400 people will die.

If program B is adopted, there is a 1/3 probability that no people will die, and a 2/3 probability that 600 people will die.

• Two gains
• A two hour lecture by Danny
• B) 2 one hour lectures by Danny

• Two losses
• A twenty minute shock
• 2 ten minute shocks

The Risk Function

The Risk Function

Overweighting of small percentages

Underweighting of large percentages

Certainty is a special case

weight

0 100

probability

The Risk Function

Lotteries

weight

Medical Warnings

0 100

probability

Weighting Biases

Which do you prefer:

Option A

5% of \$12

5% of \$14

90% of \$96

Option B

10% of \$12

5% of \$90

85% of \$96

Weighting Biases

10% of \$12 and 90% of \$96

10% of \$12

5% of \$96

85% of \$96

5% of \$12

5% of \$12

90% of \$96

5% of \$12

5% of \$14

90% of \$96

10% of \$12

5% of \$90

85% of \$96

Reference Points

You are lying on the beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite beer. A companion gets up to make a phone call, and offers to bring back a beer from the only nearby place where beer is sold, a fancy resort hotel. He asks how much you are willing to pay for the beer. Assuming your friend would not inflate the price, what price do you tell him?

Reference Points

You are lying on the beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite beer. A companion gets up to make a phone call, and offers to bring back a beer from the only nearby place where beer is sold, a small, run-down grocery store. He asks how much you are willing to pay for the beer. Assuming your friend would not inflate the price, what price do you tell him?

Prospect Theory

• Summary:
• The Value Function
• The Risk Function
• Reference Points

Getting at cognitive Strategies

Why Self-Report Fails:

Split brain

Priming Studies

Other manipulations

Why Study Errors?

• No Self-Reports
• Knowing when the system fails, helps us understand how the system works
• The most persuasive evidence is counter-intuitive
• Soooo much fun!

Error #1: Availability

Do more people die each year from shark attacks or being hit by falling coconuts?

Vs.

Error #1: Availability

On his way out, Sanders staggered against a serving table, knocking a bowl to the floor

On his way out, Sanders staggered against a serving table, knocking a bowl of guacamole dip to the floor, and splattering guacamole on the white shag carpet

Error #2: Representativeness

Jack is a 45 year old male. He is generally conservative, but shows little interest in political or social issues. He spends his free time on his hobbies which include HAM radio and mathematical puzzles. The probability that Jack is one of 30 engineers in a sample of 100 individuals is _____%

Error #2: Representativeness

Jack is a 45 year old male. He is generally conservative, but shows little interest in political or social issues. He spends his free time on his hobbies which include HAM radio and mathematical puzzles. The probability that Jack is one of 70 engineers in a sample of 100 individuals is _____%

Error #2: Representativeness

In a random group of five people, which set of birthdays is more likely:

March 5th , Jan 26th, July 17th, August 1st, August 12th

May 1st, May 3rd, May 5th, May 7th, May 9th

Error #2.5:Base Rate Fallacy

Assume the following:

1 out of 1000 women who gets a mammogram has cancer

Mammograms detect 99% of breast cancer cases

Mammograms have a .5% false alarm rate

What are the odds that a woman who tests positive actually has cancer?

Error #2.5:Base Rate Fallacy

Only 1 in 6 women who have cancer detected actually have cancer!!!

Error #3: Anchoring

You have 10 seconds to estimate the answer to the following problem:

10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = _____

Error #3: Anchoring

You have 10 seconds to estimate the answer to the following problem:

1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 x 9 x 10 = _____

Error #3: Anchoring

Estimations are biased even for absurd anchors!

Is Danny older than 65?

Is Danny younger than 10?

How old is Danny?

Error #4: Confirmation Bias

RULE: If a card has a vowel on one side, then it has an odd number on the other.

Which cards do you have to turn over to know if the rule is true?

A

B

1

2

Error #4: Confirmation Bias

RULE: If somebody is drinking, they must be over 21 years of age

Which cards do you have to turn over to know if the rule is true?

Not Drink

Drink

21

18

Error #5:Status Quo Bias

People don’t want to have to change from the current situation, and require great incentive to do so.

Error #6:Gambler's Fallacy

The mean IQ of the population of 8th graders is known to be 100. You have selected a random sample of 50 children for a study on educational achievements. The first child you test has an IQ of 150. What do you expect the mean IQ to be for the whole sample?

Error #7:Causal Bias

What are the odds that in the next 10 years India and Pakistan will get involved in a nuclear war, which will draw in other nuclear powers such as the United States and Russia leading to an all out Nuclear war.

What are the odds that in the next 10 years United States and Russia will be involved in an all out Nuclear War?

Conclusions

1) Prospect Theory’s Value Function, Risk Function, and Reference Points make it the premier Decision Making Theory

2) Errors are an excellent way of examining how we think

3) We use heuristics to lighten the cognitive load of difficult tasks