Study GuideComm 402, Spring 2012Exam 2Please note: This is not an exhaustive review. You are responsible for knowing everything that was gone over in the text chapters, discussion sections, and lectures.Lave & March, Chapter 41. What is the choice process being modeled in this chapter?a. Examine all possible plans/optionsb. Idenitify all possible outcomes for each optionc. Value each outcome you have identifiedd. Estimate the probability of each outcomee. Choose the outcome with the highest expected value 2. How do you calculate Expected Value (EV)? a. EV =  (PiVi)b. For all possible outcomes ‘i’c. Sum of all the products of P and V3. What is the numerical range of probability? Why is probability limited to these numerical values?a. 0 to 1b. Measure in decimals or percentages, can’t have more than 100% chance ofsomething happening, can’t have less than 0% chance of something happening4. What are the two common mistakes people make when they apply probabilities intheir decisions?a. Assuming all outcomes are equally likely (lottery, assuming 50/50)b. Gambler’s fallacy – thinking you’re due for something5. How do you draw a decision tree? How do you use a decision tree to choose?a. Shows all possible plans, choices, and outcomes, as well as probabilities and values for each6. How can a decision tree be simplified? a. Working right to left, multiplying to simplify values7. What rule do you use to determine (i.e., predict) the best choice in this model? a. Whatever option has the largest calculate EV8. How do you predict the last choice?a. Lowest calculated EV< 9. What is utility? How do you obtain it? How is it measured?a. Subjective value, amount of perceived happinessb. Measured in utilsc. Maximizing expected value will give you utility10. How do you build Subjective Expected Utility (SEU) models? a. Using utils rather than money11. What’s the difference between normative and descriptive models?12. What is aggregation?a. Putting things together13. What is the “Law of Large Numbers”?a. Normative model for predictionsb. Assumes that errors are random and cancel out with a large enough sample14. How is risk defined? Why is it important?a. At least one choie has punishing consequences, instead of one just being more attractive than the otherb. It’s important because having consequences if you choose wrong will affect how you go about choosing in the first place15. Understand how to assign probability values within the decision trees including decision trees that have sub-branches.16. Understand the examples given in this chapter (e.g., raisins and wine grapes, value of voting). Make sure you can generate all the calculated numbers.17. How do you model (draw a decision tree) for different situations, e.g., decisions under risk, the case of insurance, decisions without perfect information, decisions with unknown values or probabilities, etc.? a. Without values/probabilities – do not need to calculate utility, simply needto understand what makes up utility for given choiceb. With Insurance – start with how much you’re guaranteed, 3work down to how much you could owe18. What are the assumptions of the choice model (pp. 137-138)?a. An individual has a list of alternatives from which he choosesb. An individual can draw a map of consequences of each alternativec. An individual can attach a value to each outcomed. An individual can specify the probability of any particular outcome, given the choice of any particular alternativee. An individual chooses among the alternative given by maximizing expected value19. What is a contingent choice?a. Outcome depends on other partyb. Football play example20. How does the choice model work when the other party is taken into consideration,e.g., known probabilities of the other party, unknown probabilities of the other party, etc. etc.? a. First possibility: <you know the probabilities for each of other party’s actions <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<i. Note: this implies that other party isn’t reactive to you, doesn’t learn, etc. <Poor comm model. <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<ii. Anyway, just multiply probabilities and outcomes together, and choose the thing with maximum EV Illustrated, p. 139b. <<Second possibility: <we don’t know in advance other party’s probabilities (but the outcome matrix is still accurate) <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<i. Both parties are acting intelligently, but both act in some ignoranceof what other is doing <<<<< <ii. “Game theory” – economics, conflict management, math21. When information is not adequate,<what are the possible decision rules to use?a. MiniMaxb. MaxiMaxc. MaxiMind. MiniRangee. Maximizing EV22. Five possible rules exist for choosing one's actions. Define each one of the five rules. a. Maximizing EVb. MaxiMax/Optimistic Decision Rulei. Chooses by looking at best possible outcome among alternativesc. MaxiMin/Pessimistic Decision Rulei. Chooses alternative with least potential to harmd. MiniRange/Minimum Variation Rulesi. Chooses alternative with least amount of possible surprisee. MiniMax Regret/Minimum Regret Rulei. Chooses alternative with least potential to make you feel bad if youchoose incorrectly23. Be familiar with the Sunnafrank study and its relation to concepts in the course.a. What choices people make during conversationb. The reasons why people choose particular things in interpersonal communicationc. Whether or not your predicted outcome affects how you interactProblems to Practice: Ch. 4p. 144, #1bp. 138 (football example) Chapter 5:1. What is the difference between internal and external exchange?a. Internal – one party decides between two thingsi. Ex. Do I want to buy shoes or a shirt? Do I want a cheeseburger, orto keep my three dollars?b. External – one party gives something to another party to get something in return2. What are the characteristics of marginal utility? How do you calculate marginal utility?a. It is the value of one unit added to the marginb. Not total utlity after 3 cheeseburgers, but what each additional cheeseburger addsc. Not fixed, depends on how much of the thing you already haved. Normal decreases with increasing number of things already possessedi. One exception – addictionse. Calculated by subtracting 3. What’s an indifference curve? How do you draw an indifference curve? a. When multiple combinations of trades are available, trades along the curvedo not change total utilityb. Plot trade combinations – will