Decision
Decision
Summary
Descriptive, normative, prescriptive
Expected Utility: normative theory of decision
Psychology of decision
Prospect theory: descriptive theory of decision
Thinking map: prescription for deciding
Clues for finding omitted information (continuation)
Theories
Descriptive
What is
Normative
What is better
Prescriptive
What to do
Theories
Example: Shopping for groceries
Theories
Example: Shopping for groceries
Descriptive: prices, products, supermarkets…
Theories
Example: Shopping for groceries
Descriptive: prices, products, supermarkets…
Normative: a better deal is less $$, more, quality…
Theories
Example: Shopping for groceries
Descriptive: prices, products, supermarkets…
Normative: a better deal is less $$, more, quality…
Prescriptive: 1º LIDL; 2º Feira Nova for the rest
Expected Utility
Normative theory of decision
Utility in a broad sense (“goodness”)
Premises of Expected Utility
Values are relative
-How is your wife?
-Compared to what?
Premises of Expected Utility
Weak (partial) ordering.
Either prefers A to B, prefers B to A, or indifferent
Transitive: if prefers A to B and B to C, prefers A to C
Premises of Expected Utility
Weak (partial) ordering.
Sure thing principle
1%
99%
Game X
Car
Crackers
Game Y
Luxury Cruise
Crackers
Ignore crackers when picking game
Expected Utility
Weak (partial) ordering.
Sure thing
Implies that:
E.U. =  pi x ui
Expected utility is the sum of the utilities of
outcomes multiplied by their probabilities
Expected Utility
Example:
Lottery :50,000€ with 1/100,000 probability.
Expected utility =
50,000/100,000 + 1*(-20)= -19.5€
(is utility equal to monetary value?...)
Psychology of Decision
Psychology of Decision
Thinking: one-sided versus two-sided
Psychology of Decision
Thinking: one-sided versus two-sided
Favouring one-sided thinking:
Hesitation or changing one’s mind is bad
Mimicking experts
Confusing decision with advocacy
Psychology of Decision
Thinking: Self deception
Psychology of Decision
Thinking: Self deception
Test: cold pressor pain test
With Good/bad heart, exercise increased tolerance
Exercise, repeat test
Resistance changed depending on what subjects
were told…
Psychology of Decision
Thinking: Self deception
Most drivers believe they are better than average
Most people believe to have better than average
chances of reaching 80
Psychology of Decision
Thinking: Belief overkill
People opposed to nuclear tests believe them to be
a medical danger, source of instability, and not
lead to improvements.
People in favour believed the opposite.
Psychology of Decision
Thinking: Belief overkill
People opposed to death penalty believe not to be
deterrent and morally wrong
People in favour believed it to be a deterrent and
morally acceptable.
Psychology of Decision
Bernoulli, St. Petersburg Paradox:
Flip coin until it lands “heads”. Pays 1€ if on first
throw, 2€ on second, 4€ on third…
Psychology of Decision
Bernoulli, St. Petersburg Paradox:
Flip coin until it lands “heads”. Pays 1€ if on first
throw, 2€ on second, 4€ on third…
Expected:
½ * 1+ ¼ * 2 + 1/8 * 4 +… =
½+½+½+…=

Psychology of Decision
Bernoulli, St. Petersburg Paradox:
With infinite expected return anyone should pay to
play this game. Why don’t they?
Psychology of Decision
Bernoulli, St. Petersburg Paradox:
Utility is a log function of value?
Utility
Value
Psychology of Decision
Framing:
Game 1:
25% chance of winning level.
Must choose prize:
A: 100% 30€
B: 80% 45€
Psychology of Decision
Framing:
Game 1:
25% chance of winning level.
Must choose prize:
A: 100% 30€
B: 80% 45€
Game 2:
A: 25% 30€
B: 20% 45€
Psychology of Decision
Allais Paradox (sure thing)
Situation X:
1: 100% 1k€
2:89% 1k€ 10% 5k€ 1% 0€
Situation Y:
3: 11% 1k€ 89% 0€
4:10% 5k€ 90% 0€
Psychology of Decision
Allais Paradox (sure thing)
Situation X:
1: 100% 1k€
2:89% 1k€ 10% 5k€ 1% 0€
Situation Y:
3: 11% 1k€ 89% 0€
4:10% 5k€ 90% 0€
Psychology of Decision
Allais Paradox (sure thing) Equivalent to:
1
2-11
12-100
1:
1k€
1k€
1k€
2:
0€
5k€
1k€
3:
1k€
1k€
0€
4:
0€
5k€
0€
Situation X:
Situation Y:
Prospect Theory
Kahneman, Tversky, 1979
Prospect Theory
Probability: , not p
Prospect Theory
Probability: , not p
Allais paradox
Game 30€ or 45€
Prospect Theory
Utility not linear:
Prospect Theory
Framing effects:
Gas 0.95€
Card Surcharge 0.05€
Gas 1.00€
Cash discount 0.05€
Prospect Theory
Framing effects:
Outbreak expected to
Kill 600.
A: Save 200
B: Save 600, p=33%
Prospect Theory
Framing effects:
Outbreak expected to
Kill 600.
A: 400 die
B: 600 die, p=67%
Prescriptive: Thinking Map
1.
Necessity. Objectives.
2.
Recommendations?
3.
Options/Alternatives.
4.
Consequences: Likelihood and Importance
5.
Compare the alternatives.
6.
Feasibility and contingency plans.
7.
Check the cost of deciding.
Prescriptive: Thinking Map
1.
Necessity. Objectives.
2.
Recommendations?
Keep in mind the objectives. Look for previous
solutions or recommended actions.
Prescriptive: Thinking Map
3.
Options/Alternatives.
4.
Consequences: Likelihood and
Importance
Decision is a search process. Consider different
alternatives. Check if you have enough
information to estimate consequences and
likely outcomes.
Avoid single-mindedness…
Clues for finding omitted information
(continued from last lecture)
7.
Missing or incomplete figures, graphs, tables
or data
a.
Would the figure look different if it included
evidence from earlier or later years?
b.
Has the author “stretched” the figure to
make the difference look larger?
Clues for finding omitted information
8.
Omitted effects, both positive and negative, and
both short- and long-term, of what is advocated
or what is opposed
a. Has the argument left out important positive
or negative consequences of a proposed
action?
b. Do we need to know the impact of the action
on any of the following areas: political, social,
economic, biological, spiritual, health, or
environmental?
Clues for finding omitted information
9.
Context of quotes and testimonials
Has a quote or testimonial been taken out of
context?
10.
Benefits accruing to the author from convincing
others to follow his advice?
Will the author benefit financially if we adopt
his proposed policy?
11.
Has the author left out any other information I
need to know before I make my judgement?
Importance of the negative view

There is one type of omitted information that is
so important to identify: the potential negative
effects of actions being advocated

We need to ask:
– Which segments of society do not benefit
from a proposed action? Who loses? What do
the losers have to say about it?
– How does the proposed action affect the
distribution of power?
Importance of the negative view
– Does the action influence the extent of
democracy in our society?
– How does a particular action affect how we view
the world: what we think, how we think, and
what we know and can know?
– What the are the action’s effects on our health?
Importance of the negative view
– How does the action influence our relationships
with one another? With the natural environment?
– Will the action have a slow, cumulative impact?
– What are the potential long-term negative effects
of the action?
Importance of the negative view
Opportunity costs.
What do we loose by not gaining something else?
E.g.
Investment 1: returns €11,500
Investment 2: returns €11,000 but we must use
material worth €1,000
Prescriptive: Thinking Map
5.
Compare the alternatives.
Expected utility.
Weigh multiple attributes.
Prescriptive: Thinking Map
6.
Feasibility and contingency plans.
7.
Check the cost of deciding.
Decision and implementation must be feasible.
Extras:
Aula de dúvidas ou aula extra de exercícios?
Ficha 3: vai estar online esta semana.
Decisão: qual o tema do trabalho 2.
Dúvidas...