Period 5: Cognition & Choice
Decision Heuristics 1
4/4/2006
Decision Heuristics
• Availability heuristic
• Representativeness
• Anchoring
• Perception of change is
proportional to initial level.
• Difficulty of choosing
•Asymmetric Value Function
• Emotion 4/4/2006
Behavioral regularities save
scarce mental capacity:
Bounded rationality
•Lexicographic choice.
•Mental accounts.
4/4/2006
Imagine you are to draw a ball blindfolded from an
urn containing 89 red balls, 10 blue and 1 black.
Situation I: Choose between A or B
A. Payoff: B. Payoff:
$1 mil. (.89) if red $1 mil. (.89) if red
$1 mil. (.10) if blue $2.5 mil. (.1) if blue
$1 mil. (.01) if black $ zero (.01) if black
Situation II: Choose between A or B.
A. Payoff: B. Payoff:
$zero (.89) if red $zero (.89) if red
$1 mil. (.10) if blue $2.5 mil. (.10) if blue
$1 mil. (.01) if black $ zero (.01) if black 4/4/2006
•Since red A & B within I & within
II are identical, should not affect
choice A & B.
•Since blue and black are equal in
both I & II, if payoff A > B in I, then
A > B in II.
•If not, then red between I & II is
having an effect (non-separable).
Regret?
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