Greg Francis 5/27/081Decision makingIIE 269: Cognitive PsychologyGreg FrancisLecture 34What every consumer should knowbefore buying.Decision making We have to make lots of choices course selections elections housing job cancer treatment What affects our choices? How do we make choices?Topics Influences on decision making framing effects risks alternatives loss aversion Effects are often related How can you improve your decisionmaking? utility theoryFraming effects Your decisions are influenced by the way aset of choices is presented The child custody problem two versions, essentially the same lead to different choicesVersion 1: award frame Imagine that you serve on the jury of an only-child sole-custody case following a relatively messy divorce. The factsare complicated by ambiguous economic, social, andemotional considerations, and you decide to base yourdecision entirely on the following few observations. To whichparent would you award sole custody of the child? Parent A: average income, average health, average workinghours, reasonable rapport with child, relatively stable sociallife Parent B: above-average income, very close relationship withchild, extremely active social life, lots of work-related travel,minor health problems64%Version 2: deny frame Imagine that you serve on the jury of an only-child sole-custody case following a relatively messy divorce. The factsare complicated by ambiguous economic, social, andemotional considerations, and you decide to base yourdecision entirely on the following few observations. To whichparent would you deny sole custody of the child? Parent A: average income, average health, average workinghours, reasonable rapport with child, relatively stable sociallife Parent B: above-average income, very close relationship withchild, extremely active social life, lots of work-related travel,minor health problems55%Greg Francis 5/27/082Framing effects So Parent B is the choice to award custodyand to deny custody but one necessarily precludes the other! Subjects are biased by the task at hand focus on different characteristics depending onwhether they are considering awarding ordenyingFraming effects Your decisions are influenced by the way aset of choices is presented The Asian disease problem two versions, essentially the same lead to different choicesVersion 1: Saving frame Imagine that the US is preparing for the outbreak ofan unusual Asian disease, which is expected to kill600 people. Two alternative programs to combatthe disease have been proposed. Assume that theexact scientific estimates of the consequences ofthe programs are as follows: If program A is adopted, 200 people will be saved. If program B is adopted, there is a 1/3 probabilitythat 600 people will be saved and a 2/3 probabilitythat no people will be saved.72%Version 2: Dying frame Imagine that the US is preparing for the outbreak ofan unusual Asian disease, which is expected to kill600 people. Two alternative programs to combatthe disease have been proposed. Assume that theexact scientific estimates of the consequences ofthe programs are as follows: If program A is adopted, 400 people will die. If program B is adopted, there is a 1/3 probabilitythat nobody will die and a 2/3 probability that 600people will die.78%Choices and framing The two problems are essentiallyidentical, except that the choices arephrased differently 200 people saved = 400 people dead 2/3 probability that no one is saved = 2/3probability that 600 will die But the phrasing makes a difference inthe choices of subjects why?Risks Risk corresponds to those events thatoccur with probability will I like the next movie starring Matt Damon? will I live to be 50? will the dice show double sixes? Events that occur with certainty are withoutrisk the sun will rise tomorrow I will be older tomorrow I will give you an A if your grade is 90 or aboveGreg Francis 5/27/083Risk Humans sometimes prefer risky optionsover non-risky options and vice-versa When the choices are perceived as losses subjects tend to be risk-seeking When the choices are perceived as gains subjects tend to be risk-averse Decision making is open to manipulation subjects can contradict themselvesRisk: monetary choices Assume yourself richer by $300 than you aretoday. You have to choose between A) a sure gain of $100. B) 50% chance to gain $200 and 50% chanceto gain nothing. Subjects tend to prefer the sure gain risk averse with perceived gains72%Risk: monetary choices Assume yourself richer by $500 than you aretoday. You have to choose between A) a sure loss of $100. B) 50% chance to lose nothing and 50%chance to lose $200. Subjects tend to prefer the risky option risk seeking with perceived losses64%Notice Selecting A) in either situation means you endup with $400 $300 + $100 $500 - $100 Selecting B) in either situation means you endup with either $500 or $300 $300 + $200 or $300 + $0 $500 - $0 or $500 - $200 People do not just look at the “bottom line” which is why businesses emphasize that approachAlternatives: version 1 Imagine you are shopping for a new car and havenarrowed down your choices to three models.According to a consumer magazine, the cars’ ridequality (RQ) and gas mileage (GM) are rated asModel RQ GMAsteroid 100 27Bravo 80 33Comet 100 21 Which car do you select?69%29%2%Alternatives: version 2 Imagine you are shopping for a new car and havenarrowed down your choices to three models.According to a consumer magazine, the cars’ ridequality (RQ) and gas mileage (GM) are rated asModel RQ GMAsteroid 100 27Bravo 80 33Clarion 60 33 Which car do you select?19%79%2%Greg Francis 5/27/084Notice Subjects hardly ever select the Comet or theClarion you might think they do not enter the decisionmaking process at all! but they do The comparison of Asteroid and Comet clearlyfavors the Asteroid it is less clear for the Bravo and Comet it is the reverse for ClarionConsumer beware Stores are very aware of this type ofbehavior Thus, they often stock merchandise for thesole purpose of influencing your purchasingbehavior usually towards a more expensive model Likewise companies make low-end modelssimply to bias you toward higher endmodels and against the competitionLoss aversion