06.02_Thinking1 - Do more words Begin with the letter R or...

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© S. J. Luck All rights reserved 1 © S. J. Luck All Rights Reserved Thinking I Do more words: Begin with the letter R or have R as the third letter? Which is a more common cause of death? Diabetes or homicide? Tornado or lightning? Which kind of cancer is more common? Breast cancer? Prostate cancer? There are more than 5 countries in Africa How many are there? The population of the U.S. is approx. 300 million What is the population of England? A fair coin is flipped 8 times. Which is more likely? H H H H H H H H or H T T H H T H T A fair coin is flipped 7 times, and it was H on all 7 Which is more likely on the 8th toss, H or T? Which would you prefer? I give you a $10 bill I give you a lottery ticket with a 1/100 chance of winning $1000 The new Toyota EcoStar has a hybrid engine, ultra low emissions, and is marketed to women. Which is more likely? The EcoStar is a large truck The EcoStar is a large truck with good gas mileage • Decision-making Deciding what to do Which car should I buy? • How do people actually make decisions? Do people make decisions in an optimal way? • Judgment Drawing conclusions about facts How many countries are in Africa? • Heuristics for drawing conclusions Necessary, but may lead to systematic errors • Normative models: Classical decision theory Strongly influenced by Economics & Philosophy • AKA - Rational models of thinking What would it take to make the best possible decision? • The “Rational Decision Maker” The decision maker is fully informed of all possible outcomes of the decision The decision maker uses all relevant information The decision maker is infinitely sensitive to differences between possible outcomes (however subtle) The decision maker always selects the outcome with the best expected value • Choosing among Harvard, Berkeley, and Fresno State • Need to know all costs and benefits (outcomes) Tuition and cost of living Financial aid Enjoyment of educational experience Enjoyment of local culture Expected income after degree – Etc. • Combine all of this information in a manner that reflects the importance of each factor • Base decision solely on the above
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© S. J. Luck All rights reserved 2 • The concept of “expected value” (EV) dominates rational decision-making models • Expected value is calculated by multiplying the probability of each possible outcome by the value of that outcome and then summing them all together • Example 1: Coin Toss Win $100 for heads, and lose $100 for tails EV = .5 x $100 + .5 x -$100 = $0.00
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