Greg Francis 1/7/11 PSY200 Cognitive Psychology 1 Purdue University Decision making PSY 200 Greg Francis Lecture 33 What every consumer should know before buying. Purdue University 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? Purdue University Topics  Influences on decision making  framing effects  risks  alternatives  loss aversion  Effects are often related Purdue University Framing effects  Your decisions are influenced by the way a set of choices is presented  The child custody problem  two versions, essentially the same  lead to different choices Purdue University Version 1: award frame  Imagine that you serve on the jury of an only-child sole-custody case following a relatively messy divorce. The facts are complicated by ambiguous economic, social, and emotional considerations, and you decide to base your decision entirely on the following few observations. To which parent would you award sole custody of the child?  Parent A: average income, average health, average working hours, reasonable rapport with child, relatively stable social life  Parent B: above-average income, very close relationship with child, extremely active social life, lots of work-related travel, minor health problems 64% Purdue University Version 2: deny frame  Imagine that you serve on the jury of an only-child sole-custody case following a relatively messy divorce. The facts are complicated by ambiguous economic, social, and emotional considerations, and you decide to base your decision entirely on the following few observations. To which parent would you deny sole custody of the child?  Parent A: average income, average health, average working hours, reasonable rapport with child, relatively stable social life  Parent B: above-average income, very close relationship with child, extremely active social life, lots of work-related travel, minor health problems 55%Greg Francis 1/7/11 PSY200 Cognitive Psychology 2 Purdue University Framing effects  So Parent B is the choice to award custody and to deny custody  but one necessarily precludes the other!  Subjects are biased by the task at hand  focus on different characteristics depending on whether they are considering awarding or denying Purdue University Framing effects  Your decisions are influenced by the way a set of choices is presented  The Asian disease problem  two versions, essentially the same  lead to different choices Purdue University Version 1: Saving frame  Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows:  If program A is adopted, 200 people will be saved.  If program B is adopted, there is a 1/3 probability that 600 people will be saved and a 2/3 probability that no people will be saved. 72% Purdue University Version 2: Dying frame  Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows:  If program A is adopted, 400 people will die.  If program B is adopted, there is a 1/3 probability that nobody will die and a 2/3 probability that 600 people will die. 78% Purdue University Choices and framing  The two problems are essentially identical, except that the choices are phrased differently  200 people saved = 400 people dead  2/3 probability that no one is saved = 2/3 probability that 600 will die  But the phrasing makes a difference in the choices of subjects  why? Purdue University Risks  Risk corresponds to those events that occur 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 without risk  the sun will rise tomorrow  I will be older tomorrow  I will give you an A if your grade is 90 or aboveGreg Francis 1/7/11 PSY200 Cognitive Psychology 3 Purdue University Risk  Humans sometimes prefer risky options over 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 themselves Purdue University Risk: monetary choices  Assume yourself richer by $300 than you are today. You have to choose between  A) a sure gain of $100.  B) 50% chance to gain $200 and 50% chance to gain nothing.  Subjects tend to prefer the sure gain  risk averse with perceived gains 72% Purdue University Risk: monetary choices  Assume yourself richer by $500 than you are today. 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 losses 64% Purdue University Notice  Selecting A) in either situation means you end up with $400  $300 + $100  $500 - $100  Selecting B) in either situation means you end up 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 approach Purdue University Alternatives: version 1  Imagine you are shopping for a new car and have narrowed down your choices to three models. According to a consumer magazine, the cars’ ride quality (RQ) and gas mileage (GM) are rated as Model RQ GM Asteroid 100 27 Bravo 80 33 Comet 100 21  Which car do you select? 69% 29% 2% Purdue University Alternatives: version 2  Imagine you are shopping for a new car and have narrowed down your choices to three models. According to a consumer magazine, the cars’ ride quality (RQ) and gas mileage (GM) are rated