Argument connected series of statements premises that are intended to give reasons to believe some further statement conclusion is true Valid premises are true then it is impossible for the conclusion to be false Conclusion is false then at least one of the premises must be false Sound all the premises are true and it is valid Deductive attempts to be valid Inductive attempts to be sound All women cook Sue is a woman Sue cooks Sue is a woman Most women clean Sue cleans Descriptive theory Describes what you in fact do Expected utility Econs Prescriptive theory Describes what you ideally should do Prospect theory Humans Expected Utility the weighted average of all possible outcomes under certain circumstances with the weights being assigned by the likelihood or probability that any particular event will occur The utility of gain is assessed by comparing the utilities of two states Prospect theory that people make decisions based on the potential value of losses and gains rather than the final outcome and that people evaluate these losses and gains using certain heuristics The focus is on gains and losses not states Evaluation is relative to a neutral reference point A principle of diminishing sensitivity in a variety of dimensions Loss aversion Two curves are not symmetrical The response to losses is stronger than the response to gains loss aversion Loss Aversion people s tendency to strongly prefer avoiding losses to acquiring gains Losses loom larger than gains Endowment effect People tend to put more value on something they own and cherish We can combat the endowment effect by thinking like a trader Ask yourself How much do I want to have X compared with other things I could have instead The asymmetry between the pleasure of getting and the pain of giving up is irrelevant Fourfold Pattern Possibility Effect causes highly unlikely outcomes to be weighted disproportionately more than they deserve We tend to overweight small risks Willing to pay far more than expected value to eliminate them altogether Improbable outcomes are overweighed Ex 5 risk of amputation Certainty effect outcomes that are almost certain are given less weight than their probability justifies Overweighting of small probabilities increases the attractiveness of both gambles and insurance policies Outcomes that are almost certain are underweighted relative to actual certainty Ex 95 risk of disaster Denominator neglect the focus on the number of times a target event has happened numerators without consideration of the overall number of opportunities for it to happen denominators Ex 0 001 risk of permanent disability vs one of 100 000 permanently disabled Low probability events are much more heavily weighted when described in terms of relative frequencies how many than when stated in more abstract terms of chances risk or probability how likely Mental accounting the theory purports individuals assign different levels of utility to each asset group which affects their consumption decisions and other behaviors Ex 2 sports fans get tickets to s game One bought the ticket while the other got his for free A blizzard is supposed to come Which fan is more likely to brave the blizzard to see the game To avoid mental accounting o Imagine you always pay in cash o Consider big purchases in terms of their components and assess each component o Wait before spending found money o Imagine all your money is hard earned money Sunk Costs costs that are already paid Costs are already gone and can not be regained Ignoring sunk costs can cause others to pass negative judgments about you that may be future reputation costs Honoring costs that have already been paid Sunk cost fallacy o The decision to invest additional resources in a losing account when better investments are available Framing effect people react to a particular choice in different ways depending on whether it is presented as a loss or as a gain Current racism and sexism occurs in the labor market and is at least a partial cause of the differences but not necessarily the sole cause An explicit bias is a conscious voluntary or publicly endorsed attitude An implicit bias is a non conscious non voluntary and often unknown attitude Kahneman Daniel Thinking Fast and Slow New York Farrar Straus and Giroux 2011 Print Fritz Kyle PHI 2100 Florida State University Tallahassee Fl Lecture Resources Used Online Definitions
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