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Cognition and Choice - Economic Costs - Lecture Slides, Slides of Economics

This lecture is from Economic Costs. Key important points are: Cognition and Choice, Decision Heuristics, Lexicographic Choice, Mental Accounts, Availability Heuristic, Perception of Change, Proportional to Initial Level, Difficulty of Choosing, Asymmetric Value Function, Behavioral Regularities

Typology: Slides

2012/2013

Uploaded on 01/29/2013

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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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Decision Heuristics 1

4/4/

Decision Heuristics

  • Availability heuristic
  • Representativeness
  • Anchoring
  • Perception of change is proportional to initial level.
  • Difficulty of choosing •Asymmetric Value Function
  • Emotion (^) 4/4/

Behavioral regularities save

scarce mental capacity:

Bounded rationality

• Lexicographic choice.

• Mental accounts.

4/4/

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/

• 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?

Decision Heuristics 2

4/4/

Emotion

  • Emotions shape choices as well as rewards.
  • Regret, anxiety and guilt.
  • Non-calculated psychic causality.
  • Conflicting motivations have to be worked out on the fly.

4/4/

Key Points

  • Individuals have different utility functions and abilities.
  • Preferences change.
  • Multiple brains. Functions not transitive and complete.
  • People do (can) not always calculate.
  • People like reasons.

4/4/

More points

  • One person’s utility is affected by choices of others.
  • Work has direct utility.
  • Utility is often non-additive and non- separable.
  • We are emotional.
  • Framing is agenda power.
  • Heuristics save mental energy. 4/4/

Implications for Research

  • “Individuals may be rational but the aggregate is not.”
  • Contingent valuation?
  • Advertizing?
  • Political campaigns?