Decision Making choice maximizing utility framing effects

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Decision Makingchoicemaximizing
utilityframing effects
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Utility theory A Normative Theory of Choice

• Each decision has associated costs and benefits.
• Costs and benefits are, to certain extent,
  subjective
• Most decisions carry certain amount of
  uncertainty or risk (probability that the
  expected outcome will occur)
• expected utility subjective utility of a
  particular outcome probability of the outcome
  
• Ideal decision makers should maximize expected
  utility that is, they should choose so to
  maximize benefits, and minimize costs
• Problems
• It is tricky to assess expected utility
  (particularly for the future)
• People do not reason this way

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Calculating Expected Value (Expected Utility) P
probability of a particular outcome (ranges
from 0 to 1) V value of a particular outcome
(the cost or benefit associated with the
outcome) Expected Value P x V If multiple
outcomes are possible given a particular
decision, then the expected value of all possible
outcomes is added up.
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Calculating Expected Value
Suppose you get to choose between two different
games of chance (1) Winning 40 with
probability .20 or (2) Winning 30 with
probability .25 Which is the better choice?
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Calculating Expected Value
(1) Winning 40 with probability .20 The expected
value of choice 1 is .2 x 40 8 (2)
Winning 30 with probability .25 The expected
value of choice 2 is .25 x 30 7.50 Choice
1 has the higher expected value. Another way to
think about expected value is as the average
outcome over the long run.
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Another example of expected value
--What is the expected value of a powerball
lottery ticket? --Largest powerball jackpot ever
195,000,000 !! --Probability of winning the
powerball 1 in 10,000,000,000. --The expected
value .00000000001 x 195,000,000 2 lousy
cents.
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Framing Effects
- Peoples tendency to be influenced by the
manner in which choices are presented or framed.
Choice A. Winning 40 with probability .40
people pick this Choice B. Winning 30
with probability .50 if both probabilities are
doubled A. Winning 40 with probability .80 B.
Winning 30 with probability 1.00 people pick
this Certainty Effect People tend to prefer
sure gains (risk averse for gains)
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• Positive Frame
• Imagine that the US is preparing for the outbreak
  of an unusual tropical disease, which is expected
  to kill 600 people. Two alternative programs to
  combat the disease have been proposed. The
  estimates of the programs effects are as
  follows
• Program A
• 200 people will be saved.
• Program B
• 1/3 chance that 600 people will be saved.
• 2/3 chance that 0 people will be saved.
• The expected value is the same for both programs

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• Negative Frame
• Imagine that the US is preparing for the outbreak
  of an unusual tropical disease, which is expected
  to kill 600 people. Two alternative programs to
  combat the disease have been proposed. The
  estimates of the programs effects are as
  follows
• Program C
• 400 people will die.
• Program D
• 1/3 chance that 0 people will die
• 2/3 chance that 600 people will die.

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Negative Frame
Positive Frame

• Program A
• 200 people will be saved.
• Program B
• 1/3 chance that 600 people will be saved.
• 2/3 chance that 0 people will be saved.

• Program C
• 400 people will die.
• Program D
• 1/3 chance that 0 people will die
• 2/3 chance that 600 people will die.

72 of subjects pick Program A when the problem
is framed in terms of lives saved. With the
positive frame, subjects are risk averse.
Only 20 of subjects pick Program C when the
problem is framed in terms of deaths. With the
negative frame, subjects become risk takers.
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A Hypothetical Value Function
Value


gains
losses
- The pain of a loss is greater than the
pleasure of a gain. - small loses hurt
(proportionally more) than big losses
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Cash or Credit??
1.30/gal 5 cent discount for cash...
gains
Discount seems negligible, people use credit
card.
1.25/gal 5 cent charge for credit...
Surcharge is outrageous people pay cash.
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Framing effects are everywhere Whats better?
A basketball player who makes 75 of his
free-throws, or one who misses 25 or his
free-throws?
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Justification Effects Another Departure from
Expected Value Theory
Imagine that you are planning a vacation in a
warm spot over spring break. You have two
optionsThe travel brochure give only a limited
amount of information about the two options.
Given the information available, which vacation
spot would you prefer?
Spot A average weather average beaches medium
quality hotel medium temperature water
Spot B lots of sunshine gorgeous beaches and
coral reefs ultra-modern hotel very cold
water very strong winds
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Imagine that you are planning a vacation in a
warm spot over spring break. You have two
optionsbut you can no longer retain your
reservation for both. The travel brochure give
only a limited amount of information about the
two options. Given the information available,
which reservation do you decide to cancel?
Spot B lots of sunshine gorgeous beaches and
coral reefs ultra-modern hotel very cold
water very strong winds
Spot A average weather average beaches medium
quality hotel medium temperature water
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prefer cancel
total option A 33 52 85 option B
67 48 115
- Option B has features that allow subjects to
justify a good or bad rating. - Thus, subjects
decide by referendum on option B - How the
question is framed, - emphasizes the (very)
positive aspects of option B, or - emphasizes
the (very) negative aspects of option B
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Justification Effects Last presidential election
Bush Strongly opposed to gay marriage Strong
ideas on taxes Strong ideas on health
insurance Strong position on Irak Strong
unilateralism Fervent religious Strongly oppose
to abortion
Kerry Moderate on gay marriage Moderate on
taxes Moderate on health insurance Unknown on
Irak Moderate on Foreign Affairs Moderately
religious Mixed message on abortion (personally
opposes but Wont legislate against it)
- Election was a referendum on the president -
Both campaigns target Bush and try to frame him
to their advantage - negative frame anti-civil
liberties, regressive taxes, mesianic,
anti-choice - positive frame moral values,tax
relief, religious, pro-life
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Justification living with your decisions

• People make choices that they can justify to
  themselves (thus reducing regret)
• Even if those choices are sometimes irrational
• One last example
• you passed the exam - you buy ticket to Hawaii
  (to celebrate)
• You failed the exam - you buy ticket to Hawaii
  (to cheer yourself up)
• You dont know whether you passed or you failed
• Logically, you should buy the ticket, but
• People are reluctant in this situation (no
  justification?)

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Summary

• Utility theory fails to describe how people make
  decisions
• Frame effects
• Influence of justifications (minimize regret)

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Other issues

• Difficulty predicting future values
• Wilson and Gilbert (on happiness)
• Peak and end assessment of pain
• Happiness (California) (Kahneman 1999)