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Section I – Chapter One
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
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Remember the sentences
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.
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Section I – Chapter One
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
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Section I – Chapter One
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
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Section I – Chapter One
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
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Section I – Chapter Two
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
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Section I – Chapter Two
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
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Section I – Chapter Three
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
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Section I – Chapter Three
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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Section I – Chapter Three
“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
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Section I – Chapter Three
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
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Section II – Chapter Four
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
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Section II – Chapter Four
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
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Section II – Chapter Four
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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Section II – Chapter Four
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?
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Section II – Chapter Five
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 $75B. 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?
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Section II – Chapter Five
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 $75B. 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?
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Section II – Chapter Five
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. Do you think possession of firearms should be more legally restricted?2. Do you think firearm restrictions will reduce the number of gun-related
crimes?
OR
3. Do you think firearm restrictions will reduce the number of gun-related crimes?
4. Do you believe possession of firearms should be more legally restricted?
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Section II – Chapter Five
When participants know little about a subject they are questioned on, they are more easily influenced
Individuals can be conditioned to express “psuedo-opinions” 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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Section II – Chapter Five
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
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Section II – Chapter Six
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
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Section II – Chapter Six
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.
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Section II – Chapter Six
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?
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Section II – Chapter Six
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.
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Section II – Chapter Six
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).
Models of Decision Making
Expected Utility Theory
Paradox in Rationality
Descriptive Models of Decision Making
Expected Utility Theory
Assumption:
The value (utility) of money declines with increasing amount of money
Expected Utility Theory
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
Expected Utility Theory
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
Expected Utility Theory
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
Extensions of Expected Utility Theory
Subjective probabilities of outcomes
Stochastic model of choice People’s preferences are stochastic
Violation of Cancellation
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
Violation of Cancellation
Result of Survey:
Most people choose alternative A in problem 1 and B in problem B, which serves as a violation of cancellation
Intransitivity
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
Intransitivity
The reason for violation of transitivity is that more than one criteria is applied in decision making process
Preference Reversals
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.
Preference in Reality
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.
Comments of Expected Utility Theory
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
Irrational Assumptions of Expected Utility Theory
Complete Information
Clearly Calculated Advantages and Disadvantages
Satisficing
“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
Overview of Prospect Theory
Definition of value instead of utility
Definition of decision weights instead of probability
Certainty Effect
Prospect Theory
Replace utility with value
Instead of being defined as net wealth, value is defined in terms of gains and losses.
Prospect Theory
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
Prospect Theory
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
Prospect Theory
Result of Survey
84 percent of respondents select sure gain and 70 percent choose risky alternative
Prospect Theory
Instead of using probability, decision weights are used
Decision weights tend to overweight small probabilities and underweight moderate and high probabilities
Prospect Theory
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
Prospect Theory
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
Prospect Theory
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
Prospect Theory
People would like to pay more to remove the only from a gun than they would to remove one of four bullets
Prospect Theory
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.
Prospect Theory
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
Regret Theory
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
Choice between Two Alternatives
Compensatory Strategy:
Weighted Dimension
Additive Difference Model
Ideal Point Level
Choice among Multiple Alternatives
Conjunctive ruleeliminate the alternatives that fall outside certain predefined boundaries
Disjunctive ruleEach alternative is evaluated in terms of its best attribute
Lexicographic ruleAlternatives are evaluated based on ordered dimensions, and eliminate the undesirable alternatives step by step
Elimination by AspectsDimensions are selected with a probability proportional to its importance
Heuristics and Biases
Representativeness Heuristic The availability Heuristic Probability and Risk Anchoring and Adjustment The perception of randomness
Representative Heuristic
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
Representative Heuristic
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
Representative Heuristic
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
The Law of Small Number
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?
Other Representative Biases
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
The Availability Heuristic
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.
The Availability Heuristic
Which is more likely cause of death in the United States-being killed by falling airplane parts or by a shark?
The Availability Heuristic
Result of SurveyMost 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
The Availability Heuristic
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
The Availability Heuristic
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)
Probability and Risk
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
Probability and Risk
ConservatismPeople are quite slow to adjust their perceived probability when new information is added
Perceived probability can be affected by people’s positions or original beliefsThe 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
Anchoring and Adjustment
Is the percentage of African countries in the United States greater or less than 65?
What the exact percentage?
Anchoring and Adjustment
Is the percentage of African countries in the United States greater or less than 15?
What the exact percentage?
Anchoring and Adjustment
People’s answers are different widely when exposed to different initial figures
Anchoring and Adjustment
The answer is 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