1. Section I Chapter One “Selective Perception” 2.

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The Psychology of Judgment and Decision Making

Section I & II

Victor Benjamin

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Section IChapter One

“Selective Perception”

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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

http://www.youtube.com/watch?v=vJG698U2Mvo&t=0m3s

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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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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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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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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 IChapter Two

“Cognitive Dissonance”

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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 IChapter Three

“Memory and Hindsight Bias”

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Section I – Chapter Three

Close your eyes and try to remember different birthdays you have had.

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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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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

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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 IIChapter Four

“Context Dependence”

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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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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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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?

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Section IIChapter Five“Plasticity”

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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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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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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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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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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 IIChapter Six

“The Effects of Question Wording and Framing”

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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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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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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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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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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?

The Psychology of Judgment and Decision MakingModels of Decision-making

Heuristics and biases

Models of Decision Making

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

Extensions of Expected Utility Theory

Subjective probabilities of outcomes

Stochastic model of choice People’s preferences are stochastic

Paradox in Rationality

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

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

IQExperience (years)

A 120 1

B 110 2

C 100 3

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

Descriptive Models of Decision

Satisficing

Prospect Theory

Regret Theory

Multi-attribute Choice

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

Losses Gains

Value

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

Probability

Deci

sion

Weig

hts

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

Multi-Attribute Choice

Multi-Attribute: outcomes cannot be evaluated on a single metric

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


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

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?

The Law of Small Number

Result of Survey:

Most people choose Tails.

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.


Which is more likely cause of death in the United States-being killed by falling airplane parts or by a shark?


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


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)

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?


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 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

The Perception of Randomness

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

1. Section I Chapter One “Selective Perception” 2.

Documents

dissonance findings

predecisional dissonance

postdecisional dissonance

decisions people

possible theory

individuals reality

selective perception

reality fall