Introduction to Preference and Decision

Making

Psychology 466: Judgment & Decision Making

Instructor: John Miyamoto 11/04/2015: Lecture 06-2

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Rational decision making requires:

• A definition of the decision that we are trying to make.

• Generating a list of options (things you can do)

• An evaluation of the uncertainties that are associated with

our options. This includes an evaluation of risks.

• An evaluation of our preferences and values –

How much do we want some things or how much do

we want to avoid other things?

Psych 466, Miyamoto, Aut '15

Where Are We in Psych 466?

Same Slide with Emphasis on Creative Aspects of Decision Making

Why be concerned about “rational decision making?

3

Rational decision making requires:

• A definition of the decision that we are trying to make.

• Generating a list of options (things you can do)

• An evaluation of the uncertainties that are associated with

our options. This includes an evaluation of risks.

• An evaluation of our preferences and values –

How much do we want some things or how much do

we want to avoid other things?

Psych 466, Miyamoto, Aut '15

Where Are We in Psych 466?

Weak Psychological

Theory & Research

Same Slide with Emphasis on Uncertainty

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Rational decision making requires:

• A definition of the decision that we are trying to make.

• Generating a list of options (things you can do)

• An evaluation of the uncertainties that are associated with

our options. This includes an evaluation of risks.

• An evaluation of our preferences and values –

How much do we want some things or how much do

we want to avoid other things?

Psych 466, Miyamoto, Aut '15

Where Are We in Psych 466?

Same Slide with Emphasis on Preference and Value

Extensive Theory & Research

5

Rational decision making requires:

• A definition of the decision that we are trying to make.

• Generating a list of options (things you can do)

• An evaluation of the uncertainties that are associated with

our options. This includes an evaluation of risks.

• An evaluation of our preferences and values –

How much do we want some things or how much do

we want to avoid other things?

Psych 466, Miyamoto, Aut '15

Where Are We in Psych 466?

Same Slide without any Emphasis Rectangles

Extensive Theory & Research

6

Rational decision making requires:

• A definition of the decision that we are trying to make.

• Generating a list of options (things you can do)

• An evaluation of the uncertainties that are associated with

our options. This includes an evaluation of risks.

• An evaluation of our preferences and values –

How much do we want some things or how much do

we want to avoid other things?

Psych 466, Miyamoto, Aut '15

Where Are We in Psych 466?

8 Elements of Smart Choices

7Psych 466, Miyamoto, Aut '15

Outline: The Eight Elements of Smart Choices

Problem

Objectives

Alternatives

Consequences

Tradeoffs

Uncertainty

Risk Tolerance

Linked Decisions

PrOACT

Same Slide - Shuffle the Order of PrOACT Steps

AlternativesProblemObjectivesTradeoffsConsequences

8Psych 466, Miyamoto, Aut '15

Outline: The Eight Elements of Smart Choices

Problem

Objectives

Alternatives

Consequences

Tradeoffs

Uncertainty

Risk Tolerance

Linked Decisions

PrOACTAlternativesProblemObjectivesTradeoffsConsequences

9Psych 466, Miyamoto, Aut '15

Outline: The Eight Elements of Smart Choices

Problem

Objectives

Alternatives

Consequences

Tradeoffs

Uncertainty

Risk Tolerance

Linked Decisions

PrOACTAlternativesProblemObjectivesTradeoffsConsequences

10Psych 466, Miyamoto, Aut '15

Outline: The Eight Elements of Smart Choices

Problem

Objectives

Alternatives

Consequences

Tradeoffs

Uncertainty

Risk Tolerance

Linked Decisions

PrOACT

Introduction to the Theory of Preference

11Psych 466, Miyamoto, Aut '15

Introduction to the Study of Preference

The study of preference is primarily the study of:

1. how people make choices between alternatives, objects or options, and ...

2. how people evaluate the attractiveness/unattractiveness of options

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• NOT major foci of the psychology of decision making:o How people create a mental definition of the decision problem o How people generate the alternatives (options) is not usually studied.

o These are important issues, but psychologists haven’t discovered a good way to study imagination, creativity, ….

Overview of Lecture

12Psych 466, Miyamoto, Aut '15

Overview

• Riskless preference

• Risky choice / decision under risk

• Some examples of theories of riskless preference

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• Preference under risk

• Heuristic choice strategies

Basic concepts of preference theory

13Psych 466, Miyamoto, Aut '15

Basic Concepts of Preference Theory

• Preferential choice:

Choosing among options, objects, choices, actions.

• Decision making: Define objectives, define alternatives,

evaluate alternatives, choose among alternatives.

• Judgment: Evaluating an object, alternative, possibility, or option on a

single dimension.

Examples of Judgments:o How likely is the event X?o How desirable is a specific option, e.g., an invitation to go to a movie? o How much do you approve of Barack Obama’s policies?o How much would you be willing to pay for this house?

What price should you ask for this house that you are selling?

More Basic Concepts

14Psych 466, Miyamoto, Aut '15

Basic Concepts (cont.)

• Decision making under certainty. Riskless choice.o Example: Which do you prefer, apple pie or pumpkin pie?o Example: Which do you prefer, receiving a specific pair of shoes or a specific

new hat?

• Decision making under risk: Probabilities of the possible outcomes are

known.o Example: Which do you prefer, Option A or Option B?

Option A: Throw a fair die. Win $50 if 1 or 2. Lose $10 if 3, 4, 5, or 6.Option B: Throw a fair die. Win $100 if 1. Lose $20 if 2, 3, 4, 5, or 6.

o Example: Which do you prefer (if you have coronary artery disease)?Option A: Receive treatment by angiography with a 99% survival chance;Option B: Receive treatment by surgery with a 97% survival chance.

• Decision making under uncertainty: Probabilities of the possible outcomes

are not explicitly stated. (See next slide for examples)

Basic Concepts (cont.)

15Psych 466, Miyamoto, Aut '15

Basic Concepts (cont.)

• Decision making under certainty. Riskless choice.

• Decision making under risk: Probabilities of the possible outcomes is known.

• Decision making under uncertainty: Probabilities of the possible outcomes are not explicitly stated.

o Example: You must choose between surgery or chemotherapy for cancer. The doctor can make an educated guess about the chances of recovery and symptom improvement, but these chances are not known with high accuracy from medical data.

o Example: You must decide whether to commit to a Christmas skiing vacation now. You can make an educated guess about skiing conditions, but the chances of good conditions are just an educated guess.

Terminology in Decision Making Theory

16Psych 466, Miyamoto, Aut '15

Terminology

• Decision maker (DM): Person making a choice or decision

• Value: Subjective value of an object or outcome.

Utility: Subjective measure of how desirable/undesirable something is.

“Utility” is measured in a specific way that is defined in the theory of

expected utility.

• Objects of choice (what you choose between):

Alternatives, options, choices, actions.

• The outcomes that you experience:

Outcomes or objects or consequences.

• Aspects of the objects: Attributes, aspects, features.

Examples of Alternatives & Outcomes

Bold-face words are

emphasized in Psych 466

17Psych 466, Miyamoto, Aut '15

Example of Alternatives & Outcomes

EXAMPLE: You must choose between seeing movie X or going to a sports

event Y.

Alternatives: See movie X; go to sports event Y.

Outcomes if you choose movie X: o Outcome 1: Movie was good, made me sad, audience was noisy; Outcome 2:

Movie was mediocre, I was bored and tired; Outcome 3: Movie was great, I laughed a lot, etc..... (more possible outcomes) ....

Outcomes if you choose sports event Y: o Outcome 1: Event was exciting, my team lost, I was angry & sad; Outcome 2:

Event was boring, my team won, I was mildly happy; .... (more possible outcomes) ....

Examples of Attributes

18Psych 466, Miyamoto, Aut '15

Examples of Attributes

EXAMPLE: You must choose between seeing a specific movie X or going to

a specific sports event Y.

Alternatives: See movie X; go to sports event Y.

Outcomes if you choose movie X: o Outcome 1: Movie was good, made me sad, audience was noisy; Outcome 2: Movie was mediocre, I was

bored and tired; Outcome 3: Movie was great, I laughed a lot, etc.; .... (more possible outcomes) ....

Outcomes if you choose sports event Y: o Outcome 1: Event was exciting, my team lost, I was angry & sad; Outcome 2: Event was boring, my

team won, I was mildly happy; .... (more possible outcomes) ....

Attributes of movie outcomes: (i) acting quality; (ii) story quality;

(iii) emotional impact; (iv) companion quality; etc.

Attributes of sports outcomes: (i) level of excitement or interest;

(ii) emotional impact; (iii) weather; etc.; (iv) companion quality; etc.

Outline of Heuristic Choice Strategies

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Outline Of Heuristic Choice Strategies

• Articulated values and constructed values

• Belief sampling model for evaluative judgments or choices

• Comparison of choice strategies

• Expected Utility (EU) Theory

• Allais Paradox

• Explanations for the Allais Paradox

Psych 466, Miyamoto, Aut '15 Construction of Values

Lecture ends here

20Psych 466, Miyamoto, Aut '15

The Construction of Values

• File cabinet analogy for values:

Look up the value of something in your mental file cabinet.o Example: Should you spend $400 on a very good weekend ski trip?

Look up your subjective value for $400 and for the ski trip.Choose the one that has the higher value.

• Fischhoff: The philosophy of articulated values(Economists like this idea; psychologists not so much)

• Alternative view: Values are a mental construction.

o People construct values “on the fly” from basic values + cognitive procedures for constructing values

• Which view is correct depends on habits of valuing – we have lots of experience deciding the value of some things, but not other things.

Belief Sampling Model

21Psych 466, Miyamoto, Aut '15

Fig. 9.4: Belief Sampling Model for Evaluative Judgments(Tourangau, Rips & Rasinski, 2000)

.

COMPREHENSIONA situation, event or question prompts an evaluative judgment.

RETRIEVALMemories, images, & feelings are sampled

from long-term memory.

JUDGMENTA global summary evaluation is inferred from the sampled beliefs

RESPONSEAn appropriate response is generated,

e.g., a choice, or evaluative judgment, or an action.

Figure 10.1: Major Choice Strategies

22Psych 466, Miyamoto, Aut '15

Hastie & Dawes, Figure 10.1: Major Choice Strategies

• A better name for "whole versus part" (column 4) would be

“By Alternative versus By Attribute."

Example: Choosing an Apartment

23Psych 466, Miyamoto, Aut '15

Example: Choosing an Apartment

• Assume that you only care about 4 attributes:

Price, Location, Size, Attractiveness

Three Choice Strategies – Illustration of Characteristics of Choice Strategies

24Psych 466, Miyamoto, Aut '15

Example: Choosing an Apartment (cont.)

We will consider 3 models.

o Additive linear model (a.k.a. multiattribute utility theory or MAUT model)

o Satisficing model

o Lexicographic model

• These 3 models will illustrate the aspects noted in the preceding table:o Amount of Mental Efforto Compensatory vs Noncompensatory?o Whole vs Part?o Is the Strategy Exhaustive?

Lexicographic Strategy

25Psych 466, Miyamoto, Aut '15

Lexicographic Strategy

Step 1: Prioritize the attributes.

E.g., (1) Price, (2) Size, (3) Attractiveness, (4) Location

Step 2: Choose the alternative that is best on attribute 1 (price);

Step 3: If several alternatives are tied on attribute 1, choose the alternative that is best on attribute 2 (size)

Step 4: If several alternatives are tied as the best on attributes 1 and 2, choose the alternative that is best on attribute 3 (attractiveness).

Step 5: If several alternatives are tied as the best on attributes 1, 2 and 3, choose the alternative that is best on attribute 4 (location).

Step 6: If several alternatives are tied on all attributes, pick at random.

Application of Lexicographic Strategy to Apartment Choice

26Psych 466, Miyamoto, Aut '15

Example: Lexicographic Strategy for Choosing an Apartment

Attribute Priority Order: (1) Price, (2) Size, (3) Attractiveness, (4) Location

Step 1: Eliminate Apt B because it is inferior on price. Retain Apt A and C because they are tied on price.

Step 2: Eliminate Apt A because it is inferior on size.Apt C is the choice (unless there are other apartments not listed in the table).

Characteristics of Lexicographic Strategy

27Psych 466, Miyamoto, Aut '15

Figure 10.1 – just the part for the lexicographic strategy

Attribute Priority Order: (1) Price, (2) Size, (3) Attractiveness, (4) Location

• Mental Effort – medium. o Pretty obvious what this means.

You only have to consider one attribute at a time.

• Noncompensatory – improvements on one attribute do not compensate for deficiencies on another attributes.

o If Apt B has a worse price than another option, you will not choose it no matter how good it is on size, attractiveness and location.

Explain Whole/Part & Exhaustive Columns of the Table

28Psych 466, Miyamoto, Aut '15

Figure 10.1 – just the part for the lexicographic strategy

Attribute Priority Order: (1) Price, (2) Size, (3) Attractiveness, (4) Location

• Mental Effort – medium.

• Noncompensatory

• Whole vs Part = Attribute. This means that you consider each attribute one at a time (as opposed to making a wholistic judgment about a single alternative).

• Not exhaustive because you do not consider all attributes when making the choice.

Critique of Lexicographic Strategy

29Psych 466, Miyamoto, Aut '15

Critique of the Lexicographic Strategy for Choosing an Apartment

• Lexicographic Strategy. Prioritize the attributes in the order:

Price, Size, Attractiveness, Location.

• If there are many apartments, what are the flaws in this strategy?

What are its strengths?

Satisficing Strategy

Psych 466, Miyamoto, Aut '15 30

Thursday, November 05, 2015: The Lecture Ended Here