Problem solving and Decision Making
Questions and Correct Answers
expected utility theory
✓ ~~~ theory that says people are basically rational, so if they have all of the relevant
information, they will make a decision that results in the maximum expected utility
makes it easy to decide which choice will result in the highest monetary value, but
people don't always chose what's logically best
utility
✓ ~~~ referes to outcomes that achieve a person's goals
can also be in terms of monetary value; so goal of decision making was to make
choices that resulted in the maximum monetary payoff
endowment effect
✓ ~~~ selling price and buying price should be the same
BUT people think "if i obtained it, its worth more than if I can't get it"
It's why sellers give money-back guarantees
It's why sellers give trial periods at low prices
But is reality really better than anticipation?
,decoy item
✓ ~~~ relative rather than absolute valuation, people rate things based on other things
around it
restaurant menus: 80 shekels doesn't sound that bad when everything else is 120
shekel
devaluation
✓ ~~~ It matters WHEN you get the information even though it shouldn't
Lack of rationality in decision making
transit and stable characteristics
✓ ~~~ when people are depressed or sad, when something goes wrong you can
blame the situation or yourself
Was it a hard quiz or are you stupid ?
depressed people are more likely to say its because im so stupid
attribution bias
anchoring
, ✓ ~~~ participants were asked to indicate whether they would pay a given price -
arbitrarily set by the last two digits of their social security number - for a range of
products, after which they bid for those items in an auction
despite the arbitrary nature of these price ____________ (the utility of a bottle of
wine likely has little to do with one's social security number) people with higher social
security numbers bid more for bottles of wine
more choices
✓ ~~~ better chance of finding what you want
ultimately more satisfaction with what you chose
more freedom
BUT
more options to evaluate (more time and effort)
more options to ultimately turn down
more options to possibly regret turning down (opportunity costs)
temporal discounting
✓ ~~~ in choosing between a (smaller) immediate and a (larger) delayed reward both,
humans and animals ranging from great apes to pigeons often tend to prefer
impulsive choices for the smaller but immediately available reward. on the other
hand, and crucial for human economic behavior, we sometimes wait for the return on
financial investments for years or even decades
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