1
Section I
Chapter One
“Selective Perception”
2

Perceptions are heavily influenced by
what you expect to see

Notice anything strange about the cover
of this book?
› Specifically, the shown set of cards?

Another example
3
The ants ate the sweet jelly which was on the table.
The ants were in the kitchen.
The ants ate the sweet jelly.
The ants in the kitchen ate the jelly which was on the table.
The jelly was on the table.
The ants in the kitchen ate the jelly.
4

Most reactions towards incongruity of expectations
and reality fall are often one of the following:
› Dominance
› Compromise
› Disruption
› Recognition

Dominance can be considered as perceptual
denial
› i.e. an individual considers their perception to be correct
5

The compromise reaction can be considered as
unconscious misrepresentation of reality
› e.g. to genuinely believe there is a red six of spades on the cover

Disruption can be simply thought of as the inability to
form a perception of any sort
› “I don’t know”

Recognition is the conscious acknowledgement that
something is wrong
› However, recognition does not necessarily mean correct
perception
› e.g. recognizing something is wrong with the card but not
recognizing the color or position of symbols is wrong
6

Expectations highly influence perception and an
individual’s reality
› e.g. Placebo effect

Differences in expectations can create different
experiences of the same reality
› Fans of two opposing teams playing a football game may
perceive the game’s events differently
› News and media may be interpreted as possessing different
biases when viewed by multiple individuals

Perceptions are selective on an individual basis
› How can we consider this in our actions?
› We each have a slightly unique experience of reality
7
Section I
Chapter Two
“Cognitive Dissonance”
8

The theory of cognitive dissonance states that people generally
attempt to reduce or avoid psychological inconsistencies
i.e. when you hold two conflicting thoughts as simultaneously valid, you are
experiencing cognitive dissonance
› Two branches: “negative drive state” and “self-perception theory”
›

Negative drive state says people try to reduce cognitive
dissonance whenever possible
›
›

Theory holds cognitive dissonance is an aversive condition
People should be motivated, or “driven”, to reduce dissonance
Self-perception theory says dissonance findings are the results
of people self-observing how they behave
›
›
People discover their attitudes & emotions with varying degrees of certainty
Next they infer the causes of their behavior
9

In essence, the theories can be described as:
Self-perception theory explains dissonance findings arise from people
inferring the causes of their behavior
› Cognitive dissonance theory explains such findings are part of a natural
motivation to reduce dissonance
›

Dissonance situations generally fall into two categories:
Pre-decisional dissonance is dissonance that affects the decisions people
make (e.g. “what type of computer should I buy?”)
› Post-decisional dissonance is the dissonance that follows a choice that has
already been made (e.g. buyer’s remorse)
›

Cognitive dissonance shows that people are able to change
their attitude in reaction to their behaviors
›
Thus, people will often bring their beliefs in line with their behavior
10
Section I
Chapter Three
“Memory and Hindsight Bias”
11
Close your eyes and try to remember
different birthdays you have had.
12

Did you see yourself in the scenes you imagined? Did you have
an “out-of-body” memory?

Our memories are really just constructs of past experiences that
we create, rather than exact depictions of what has
happened in the past

Additionally, our memories are not fixed in storage, nor are
memories stored separately from each other
13
Which sentence shown here was not included in the earlier slide?
The ants ate the sweet jelly which was on the table.
The ants were in the kitchen.
The ants ate the sweet jelly.
The ants in the kitchen ate the sweet jelly which was on the table.
The jelly was on the table.
The ants in the kitchen ate the jelly.
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“The ants in the kitchen ate the sweet jelly which was on the table.”

This sentence contains combinations of relations that are not
contained in any individual sentence from the first set.

You did not construct memories for each individual statement, but
rather, you constructed one memory for the general scenario

This phenomena can sometimes lead to hindsight bias
15

Hindsight bias is the tendency to view what has already
happened as inevitable or obvious, without realization that
retrospective knowledge of what has occurred influences
judgment
It was obvious something was wrong at Enron after scandal became public
› Social media’s importance in ending totalitarian governments is obvious after it
occurred in Africa and the Middle-East.
›

Hindsight bias can be reduced by attempting to consider how
past events may have turned out differently
If you only consider the reasons why something turned out as it did, you are at
risk of overestimating how inevitable that outcome was
› Consider various scenarios of the same event unfolding differently, within
reason
›
16
Section II
Chapter Four
“Context Dependence”
17

This chapter deals with changes in perception
relative to context

Have you ever been at the gym, lifted a heavy
weight, and then subsequently lifted a lighter weight?
› Was the lighter weight easier to lift than usual?
› Did you feel the lighter weight was lighter than it actually
is? This is the contrast effect

Similarly, a big car may appear to become even
bigger when placed next to a small car
› However, it looks the same when placed next to a large
building
› Contrasted stimuli must be similar to each other for the
previous effect to take hold
18

Has your first impression of someone influence your
perception of that person in subsequent meetings?
› This is the primacy effect
› First impressions are the most important, but second and
third impressions still show significant primacy effect.

However, in some instances, the most recent
experience has more influence than a first
experience
› This is the recency effect
› According to the recency effect, you will remember
Xiaobo and Zirun’s presentation more than mine; however,
this is not always the case
19

Is primacy effect or recency effect more effective?

Let’s take the example of a debate:
If you have the choice to choose first or last in a debate, your decision
should be relative to the format of the debate
› If the debate is a sort of panel where opposing participants will debate
you immediately after you speak, it is best to be the first speaker and
capitalize on primacy effect
› If the other side has a long delay before having to respond, say an hour
or a few days, it is best to capitalize on recency effect
›

The effectiveness of the primacy effect or recency effect is
related to the context of the situation
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
The halo effect is another context-specific perception trap
Basically, people generalize other people based on a few traits rather than
view them as a collection of separate qualities and flaws
› For example, army officers may view their most intelligent cadets as the best
leaders. Another common example is some consider physically attractive
people to be happier and nicer.
›

A difficulty with context effects is that they are so common that
they sometimes seem to be invisible
They are actually impossible to avoid
› For example, your perception of new people that you meet is in the context of
people you already know
› So, is it really possible to ever truly “know a person” without comparing them to
others you know? Does everyone you meet fall somewhere into a spectrum of
people you already know?
›
21
Section II
Chapter Five
“Plasticity”
22
This chapter looks at how the wording and context
of questions can influence judgment and decision
making

Example
A.
B.
Most
– Choose one of the following choices:
A 100% chance of losing $75
A 5% chance to lose $600 and a 95% chance of losing
nothing
in the above would chose option B.
›What if option A was an insurance policy? Does it change anything?
23
This chapter looks at how the wording and context
of questions can influence judgment and decision
making

Example – Choose one of the following choices:
A. A 100% chance of losing $75
B. A 5% chance to lose $600 and a 95% chance of losing
nothing
Most in the above would chose option B.
›What if option A was an insurance policy? Does it change
anything?
24
A person’s responses to questions can be conditioned by
the ordering of the question

›For example, if a series of questions concern the same topic,
respondents may feel the need to make their responses to
questions consistent with the first question they answer

Example:
1.
2.
Do you think possession of firearms should be more legally restricted?
Do you think firearm restrictions will reduce the number of gun-related crimes?
OR
1.
2.
Do you think firearm restrictions will reduce the number of gun-related crimes?
Do you believe possession of firearms should be more legally restricted?
25
When participants know little about a subject they are
questioned on, they are more easily influenced

Individuals can be conditioned to express “psuedoopinions” in these contexts

People
will pretend to have opinions on things they do not
know about in an attempt to not appear ignorant
Example:
In the 1940s, the word incest was not as well
known as today. An experiment had a survey set up to ask
people whether they were in favor or opposed to incest.
One-third of respondents said they were in favor of incest.
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Additionally, people’s attitudes may be inconsistent
with their behaviors

Example: A man that is running late to give a speech
on the importance of being patient may become
extremely impatient

“Actions
speak louder than words”
This
idea dealt a huge blow to psychology research
that focused on attitudes. Behavioral research
became more prominent
27
Section II
Chapter Six
“The Effects of Question
Wording and Framing”
28

The wording of questions can be used to
produce skewed responses.

Example:
› Does the Transportation Service Administration
(TSA) make you feel safe?
 Many may be inclined to say no
› Does the Transportation Service Administration
(TSA) make you feel safer?
 Many who said no to the previous question may
say yes to this one
29

However, there are times that wording of questions
is important for better measurement of specific
topics

Example:
› What is the most important problem that America is
facing?
› America is facing rising energy costs and declining
education standards. Which is more important?

The second question helps focus responses to
relevant topics. In the first question, people may
respond without mentioning energy or education.
30
Another observation discussed in this chapter is that
people will often just express opinions that are
considered socially desirable

For
example, we can all agree that free speech is a
democratic ideal, and that free speech has wide
support. However:
› If a group of individuals wanted to hold a protest in favor of social
equality outside an office building social equality, should they be
permitted to do so?
› If a group of individuals wanted to hold a protest in favor of racial
segregation at a funeral, should they be permitted to do so?
31
The framing of a question can also be used to condition
responses.

Example: There is an outbreak of deadly disease in a small
American suburb. It is expected to kill 600 people. There are two
possible solutions:

›If solution A is chosen, 200 people will be saved.
›If solution B is chosen, there is a 40% probability that 600 people will
be saved, and a 60% probability that no one will be saved.
OR
›If solution A is chosen, 400 people will be die.
›If solution B is chosen, there is a 40% probability that nobody will die,
and a 60% probability that 600 people will die.
32
Decision makers not only consider their choices, but they
consider the outcome of their choices

Psychological accounting has to deal with whether people
frame an outcome in terms of the direct consequences of their
choice, or if they evaluate an outcome with respect to a previous
problem state

Consider sunk costs. If you paid $10 to go see a movie, and then your
friend invites you to hang out, what do you do (you can not get a
refund)?

› It is possible to make a choice based on you having already paid $10 to go
see a movie (previous state), or based on you can choose to spend time with
your friend and forego the movie (direct consequence).
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That’s it for Section I & II.
Any questions?
34

Expected Utility Theory

Paradox in Rationality

Descriptive Models of Decision Making
Assumption:
The value (utility) of money declines
with increasing amount of money

Ordering of Alternatives
Decision makers are able to prefer one alternative to
another


Dominance

Decision makers never adopt strategies that are
dominated by other strategies

Weak Dominance

Strong Dominance

Cancellation
If two risky alternatives include identical and equally
probable outcomes among their possible
consequences, the utility of these outcomes should be
ignored in decision making

Transitivity
If a rational decision maker prefers B to A and prefers C
to B, then the person must prefer C to A

Continuity
For any outcomes, a decision maker should always prefer a
gamble between the best and worse outcomes to a sure
outcome if the odds of the best outcomes are good enough

Invariance
Decision makers should not be affected by the way
the alternatives are represented

Subjective probabilities of outcomes

Stochastic model of choice
People’s preferences are stochastic

Violation of Cancellation

Intransitivity

Preference Reversals

Problem 1



Alternative A: $1,000,000 for sure
A 10 percent chance of getting $2,5000,000, an
89 percent chance of getting $1,000,000, and a
1 percent chance of getting $0
Problem 2


An 11 percent chance of getting $1,000,000 and
89 percent chance of getting $0
A 10 percent chance of getting $2,500,000, and
90 percent chance of getting $0
Result of Survey:
Most people choose alternative A in
problem 1 and B in problem B, which serves
as a violation of cancellation

The procedure of choosing job
applicants is as follows

If the difference in IQ between two applicants is
greater than 10, choose the more intelligent
applicant

Else choose the intelligence with more experience
IQ
Experienc
e (years)
A
120
1
B
110
2
C
100
3
The reason for violation of transitivity is that
more than one criteria is applied in
decision making process

Finding of Researchers (Intransitive or
variant?)
When people decide which gamble to
participate in, their choices are determined
by primarily a gamble’s probabilities,
whereas bids would be affected
predominantly by the amount to be won or
lost.
The approximations subjects follow in order
to simplify the difficult task of bidding might
prove to be rather efficient and not too
different from the results of optimal
strategies.
Based firmly on mathematical
foundations
 Effective tool to conduct normative
analysis
 Effective tool to build quantitative
models
 Simplified decision making, not realistic
 Not a qualified descriptive model


Satisficing

Prospect Theory

Regret Theory

Multi-attribute Choice

Irrational Assumptions of Expected Utility
Theory

Complete Information

Clearly Calculated Advantages and
Disadvantages
“However adaptive the behavior of
organisms in learning and choice situation,
this adaptiveness falls far short of the ideal
of maximizing in economic theory.
Evidently, organisms adapt well enough to
satisfice; they do not, in general, optimize”
-- Simon, 1956

Definition of value instead of utility

Definition of decision weights instead of
probability

Certainty Effect

Replace utility with value
Instead of being defined as net wealth,
value is defined in terms of gains and losses.
Value
Losses
Gains

Value function for losses is convex and
relatively steep

Value function gains is concave and not
quite steep

Loss aversion

Endowment effect: the value of a good
increased when it becomes a person’s
endowment

Problem1:
Alternative A: A 50 percent chance of gaining
$1000
Alternative B: A sure gain of $500

Problem2:
Alternative A: A 50 percent chance of losing
$1000
Alternative B: a sure loss of $500

Result of Survey
84 percent of respondents select sure
gain and 70 percent choose risky
alternative

Instead of using probability, decision
weights are used

Decision weights tend to overweight
small probabilities and underweight
moderate and high probabilities
Probability
Decision Weights

Problem 1:
Alternative A: A 1 in 1000 chance of winning
$5000
Alternative B: A sure gain of $5

Problem 2:
Alternative A: A 1 in 1000 chance of losing
$5000
Alternative B: a sure loss of $5

Result of Survey:
three in four of respondents choose the
risky alternative for problem 1; more than
four out of five respondents choose the
sure loss for problem 2
Certainty Effect:
A reduction of the probability of an
outcome by a constant factor has more
impact when the outcome was initially
certain than when it was merely probable


People would like to pay more to
remove the only from a gun than they
would to remove one of four bullets

Insurance Plan 1:
All the losses are covered, if a certain
amount of premium is paid

Insurance Plan 2:
Premiums are cut off by 50 percent, and
only 50% of losses will be covered.
Result of Survey:
People show no clear preference for the
first insurance plan, but 80 percent of
respondents indicate they do not want to
buy the second insurance plan

People compare the quality of their
decisions to what might have happened
if they make a different decision

When face with a choice between
gaining $1000 for sure and $2000 if a coin
lands on Heads, they tend to choose the
sure gain to avoid regret the coin lands
on Tails
Multi-Attribute: outcomes cannot be
evaluated on a single metric


Compensatory Strategy:
Weighted Dimension

Additive Difference Model

Ideal Point Level

Conjunctive rule
eliminate the alternatives that fall outside certain
predefined boundaries

Disjunctive rule
Each alternative is evaluated in terms of its best
attribute

Lexicographic rule
Alternatives are evaluated based on ordered
dimensions, and eliminate the undesirable
alternatives step by step

Elimination by Aspects
Dimensions are selected with a probability
proportional to its importance
Representativeness Heuristic
 The availability Heuristic
 Probability and Risk
 Anchoring and Adjustment
 The perception of randomness


People often judge probabilities by the
degree to which A is representative of B,
that is , by the degree to which A
resembles B. – Tversky and Kahneman

My definition: people’s decision making
is affected by how the information is
represented or described
Linda is 31 years old, single, outspoken, and
very bright. She majored in philosophy. As a
student, she was deeply concerned with issues
of discrimination and social justice, and also
participated in antinuclear demonstrations.
Please check off the most likely alternatives
Linda is a band teller
 Linda is a bank teller and is active in the
feminist movement


Result of Survey:
90 percent of people think the second
alternative is more likely

As the amount of detail increases, its
probability decreases but its
representativeness and hence likelihood
may increase. –Tversky and Kahneman
Suppose that an unbiased coin is flipped
three times, and each time the coin lands
on Heads. If you had to bet $100 on the
next toss, what side would you choose?

Result of Survey:
Most people choose Tails.
The hot hand
 Neglecting Base Rate
 Nonregressive Prediction
 Clinical versus Actuarial Prediction

Predictions are usually more accurate when
they are not made by a human decision
maker-even when the decision maker has
full access to actuarial information
Decision makers assess the frequency of a
class or the probability of an event by the
ease with which instances or occurrences
can be brought to mind.
Which is more likely cause of death in the
United States-being killed by falling airplane
parts or by a shark?

Result of Survey
Most people think it is shark attack
Truth
The chances of dying from airplane
parts are 30 time greater than the chances
of be killed by a shark


Imagination and Decision making
 If people can vividly imagine some event
happening, they think the probability of the
event is higher

Imagination does not guarantee a higher
perceived probability if the event is difficult to
imagine (abstract)

Imagining may not increase perceived
probability if the event is extremely negative

Vividness and Decision making

The perceived probability of an event is
higher if information about the event is vivid

Doubts about the effect of vividness
(Shelley Taylor and Suzanne Thompson)

Confusion of The Inverse
P(A|B) = P(B|A) ???
What’s the probability of breast cancer if the lab
test indicates so
Resistant to negative events
 Compound Events

People tend to underestimate disjunctive events
but overestimate conjunctive events

Conservatism
People are quite slow to adjust their perceived
probability when new information is added

Perceived probability can be affected
by people’s positions or original beliefs
The very fact that there is a breakdown of a
nuclear energy plant which caused no personnel
damage may lower nuclear advocates’ perceived
probability of devastating nuclear plant accident
while raise those of opponents of utility of nuclear
energy

Is the percentage of African countries in
the United States greater or less than 65?

What the exact percentage?

Is the percentage of African countries in
the United States greater or less than 15?

What the exact percentage?
People’s answers are different widely when
exposed to different initial figures
How thick a piece of paper would be if it is
folded 100 times
The answer is 1.27 × 1023 , which is
800,000,000,000 times the distance
between earth and sun.
People’s estimates are affected by the first
few folds and not adjusted upward enough
to reflect the exponential effects of this
process

Coincidences. Really?

Are there any rules or forces governing
the occurrences of coincidence?

Can human beings behave randomly
The answer may be yes if people are trained to do
so