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10_Decision_Making

Program c 400 people die d 13 no one dies 23

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Unformatted text preview: combine utility (value) and probability •  Multiply the utility (value) of each possible outcome by the probability of that outcome and add up all the results Example: (1) winning \$40 w/ a probability of .20 vs. (2) winning \$30 w/ a probability of .25 = \$8 = \$7.5 -not all equal-value choices are equally useful 18   \$40 at .20   \$30 at .25   \$40 at .80   \$30 at 1.00   Violations of Expected Value   Prospect Theory (Kahneman & Tversky)   Decisions based on amount of gain or loss from what we have right now   not on absolute value   Gains vs. losses   Feel losses more acutely than gains   Psychological ‘pain’ of losing \$50 greater than ‘pleasure’ of winning \$50     Risk ­averse attitude (facing sure gain) Risk ­seeking attitude (facing sure loss) Prospect Theory (Kahneman & Tversky)   Decisions based on amount of gain or loss from what we have right now   not on absolute value   Decision Weights   diﬀerence between .40 and .50 is trivial  ...
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