Language and CognitionRisky DecisionsWhen making choices about preferences, people select between known features of alternatives. In other types of decisions, however, they have to decide between unknown outcomes. This type of decision-making involves taking risks. Example: If Eric is trying to decide whether to buy a $5 raffle ticket, a risk is involved, since he has only a 1 in 1000 chance of winning a $500 prize.People make risky decisions by judging the probability of outcomes. Strategies people use to make risky decisions include calculating expected value, estimating subjective utility, and using heuristics.Expected ValueOne strategy for making a risky decision is to calculate the expected valueof the decision. People calculate the expected value by adding the value of a win times the probability of a win to the value of a loss times the probability of a loss. Example: For Eric, the value of a win is +$495 ($500 prize – $5 cost), and the value of a loss is –$5. The probability of winning is 1/1000 and the probability of losing is 999/1000. Therefore
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Probability theory, Availability heuristic, raffle ticket