MARK 5342 Advanced Topics

Day 3Decision-Making Strategies

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Compensatory Strategies

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Rules of Compensatory Strategies

Used for multi-attribute choices where the choices are comprised of multiple dimensions

People trade off low values on one dimension for high values on another dimension

Different types of compensatory strategies Linear model Additive Difference model Ideal point model

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Linear Model

Each dimension is weighted according to its importance

The weighted values are summed to form an overall index of value

This is one of the foundations of choice modeling

Based on expected utility theory

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Additive Differences Model Each choice alternative is evaluated on all

dimensions The first step is looking at all alternatives

for a single dimension The differences are weighted and summed It simplifies the choice (eliminates

unnecessary information) Tends to seem closer to how people make

decisions Based on satisficing theory

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Ideal Point Model

Comparison of each alternative to an “ideal”

Evaluate each one as to how close or far it is from the “ideal”

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Summary of Compensatory Strategies

Best suited for fairly simple decisions with few dimensions

Well suited when the dimensions are known or knowable, and when an “ideal” choice can be envisioned

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Non-Compensatory Strategies

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Rules of Non-Compensatory Strategies

Do not allow trade-offs Four major types

Conjunctive rule Disjunctive rule Lexicographic strategy Elimination by aspects strategy

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Conjunctive Rule

Eliminate any alternatives that fall outside certain pre-defined boundaries

Example of satisficing rather than optimizing

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Disjunctive Rule

Each alternative is evaluated in terms of its best attribute, regardless of the rating on other dimensions

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Lexicographic Strategy

Identify the most important dimension and choose the most desirable alternatives for that dimension

If there is more than one “winner,” go to the next most important dimension and evaluate the remaining alternatives in the same way

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Elimination-by-Aspects Strategy

Probabilistic variation of the lexicographic strategy

Each dimension selected with a probability proportional to its importance

Then alternatives are compared on that highest probability dimension and winners move to the next dimension

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Choosing Between Equal Alternatives

People pick the most important dimension of the alternatives and then select the highest rated alternative on that dimension

Pragmatic approach

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Decision-Making Facilitators and Barriers

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Rationality

Logical thinking Prefrontal cortex Metacognition – ability to reflect on

one’s own mind and thus regulate (to a degree) the emotions

Monitors emotions and decides what to take seriously and what to ignore

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Overthinking a Problem

Claude Steele Stanford sophomores took the

Graduate Record Exam (GRE) White students performed

significantly better than black students

Called the Achievement gap When students told it was just a

preparatory drill, no difference in scores

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Placebo Effect

Power of prefrontal cortex to modulate most body signals, like pain

Fake pain-relieving cream provided relief

Electric shocks mitigated Sobe Adrenaline Rush – lower price

seen as producing less effective in problem solving

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Fooling the Senses

CalTech and Stanford wine tasting experiment

Three levels of wine - $5, $45, $90 With blind testing, respondents could

sort them out fairly accurately When asked to take a short survey

about the wine characteristics, they became confused and selected incorrectly

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Mental Accounting

Brian Wansink, Cornell Bottomless bowl of soup Whatever people see on their plate,

they eat They keep track by counting plates,

or scoops of M&M’s, not actual food

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Anchoring Effect

Daniel Kahneman Random number generated by

roulette wheel and shown to respondents

Estimate the number of African countries in the United Nations

Those who saw higher roulette number guessed higher number of African countries, and those who saw lower roulette number guessed lower number of African countries

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Overconfidence

Plous, Ch. 19 Overconfidence is greatest when

accuracy is near chance levels Overconfidence diminishes as

accuracy increases from 50 to 80 percent, and when it exceeds 80 percent, people become underconfident

Discrepancies between accuracy and confidence are not related to intelligence

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Calibration

The degree to which confidence matches accuracy

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Self-test of OverconfidenceEstimate the answers at a 90% confidence level

Low High

1. Martin Luther King’s age at death

2. Length of the Nile River

3. Number of countries that are members of OPEC

4. Number of books in the Old Testament

5. Diameter of the moon in miles

6. Weight of an empty Boeing 747 in pounds

7. Year in which Wolfgang Amadeus Mozart was born

8. Gestation period (in days) of an Asian elephant

9. Air distance from London to Tokyo

10. Deepest (known) point in the ocean (in feet)

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Self-test of OverconfidenceEstimate the answers at a 90% confidence level

Answers

1. Martin Luther King’s age at death 39 years

2. Length of the Nile River 4187 miles

3. Number of countries that are members of OPEC

13 countries

4. Number of books in the Old Testament 39 books

5. Diameter of the moon in miles 2160 miles

6. Weight of an empty Boeing 747 in pounds 390,000 pounds

7. Year in which Wolfgang Amadeus Mozart was born

1756

8. Gestation period (in days) of an Asian elephant

645 days

9. Air distance from London to Tokyo 5959 miles

10. Deepest (known) point in the ocean (in feet)

36,198 feet

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Bias for certainty

Confidence in decisions is comforting That can lead to disastrously wrong

decisions Counter that by paying attention to

the details that don’t fit the overall pattern

George Day’s “small voices”

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Reducing Overconfidence

Stop to consider reasons why your judgment might be wrong

We all have blind spots – reducing overconfidence is a matter of recognizing that those blind spots may exist and trying to examine alternatives

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Behavioral Traps

Plous, Ch. 21 Embarking on a promising course of

action that subsequently becomes untenable

Taxonomy of traps Time delay traps Ignorance traps Investment traps Deterioration traps Collective traps

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Time Delay Traps

Momentary gratification versus long term consequences – smoking or extra dessert

Or avoidance of momentary discomfort versus long term consequences – skipping a dentist appointment

Marketing implication – buy now, pay later plans

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Marshmallow test of Self Control

Walter Mischel, 1970’s Four year olds Eat one marshmallow or wait a few

minutes to get two marshmallows Most kids couldn’t resist for long Kids who can’t resist tend to exhibit

behavioral problems later in life Tends to stabilize after the teen

years

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Ignorance Traps

Negative consequences not understood by the decision-maker

Common when new life paths are taken and consequences are not forseeable

Example – college students getting MSMR degrees

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Investment Traps

When prior expenditures lead people to make bad choices

People sometimes ignore the “sunk cost” of investments

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Deterioration Traps

Costs and benefits change over time, leading to less desirable outcomes

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Collective Traps

Apply to groups of people Sub-optimization by an individual

leads to adverse consequences for the group

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Prisoner’s DilemmaPrisoner A

Prisoner B

Confesses

Confesses

Doesn’t confess

Doesn’t confess

5 years

5 years

10 years

0 years

1 years

1 years

0 years

10 years

Above diagonal - Prisoner’s A sentence; below diagonal – Prisoner B’s sentence

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Prisoner’s Dilemma

Dilemma is that if both don’t confess, they get a much shorter (1 year) sentence, but are also exposed to a much longer (10 year) possibility

Both are better off confessing and taking a 5 year sentence

What would you do?

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Dollar Auction Game

A dollar is auctioned to two bidders Four rules:

1. No communication is allowed among bidders while the auction is taking place

2. Bids can be made only in multiples of 5 cents, beginning with a nickel

3. Bids must not exceed $504. The two highest bidders both have to pay

what they bid, even though the dollar goes only to the highest bidder

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Dollar Auction Game Outcomes

When the two highest bids total $1.00, the auctioneer is assured of a profit

Still attractive from the bidder’s perspective

Second inflection point is when the first bidder reaches $1

Second bidder can’t quit, as they stand to lose 95 cents if they don’t go to $1.05

Bidding often reaches a few dollars

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Ways to Avoid Entrapment

Explicitly consider withdrawal costs before beginning

Use different decision-makers for the initial and subsequent decisions – less personal involvement

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Community and Society

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Morality and the Cortex

Moral decisions tend to be regulated by emotions

Reason is invented as logical support for the emotional decision

Moral decisions require taking other people into account, not just oneself

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Experiment in Morality

Scenario 1: You are the driver of a runaway trolley. The brakes have failed. If you do nothing, five maintenance workers will die. If you swerve, one maintenance worker will die.

Scenario 2: You are standing on a footbridge over a trolley track. Unless the trolley can be stopped, five maintenance workers will die. Standing next to you is a large man, who if you push over the bridge, will fall on the track and stop the trolley, but the large man will die.

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Results

In scenario 1, when you are the driver, 95% of respondents agree it is better to swerve and save five men with one other man dying. This is a personal moral situation.

In scenario 2, almost nobody is willing to push the man over the edge, resulting in five people dying. This is an impersonal moral decision, and activates different parts of the brain.

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Morality and brain regions For personal moral decisions, a rational

moral decision process activates to generate an optimal decision – one death is better than five other deaths

For impersonal moral decisions, the area responsible for thinking about other people (superior temporal suculus, posterior cingulate, and medial frontal cortex) activate and produce confusion and a sub-optimal decision – one death is capital murder

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Sympathy and Fairness

The ultimatum game Two respondents One gets $10 and decides how to divide it The other decides to accept the offer or reject, in

which case both get nothing Economists thought most people would offer a

nominal amount like $1 and keep the rest The logical response is to accept any offer Most people rejected low offers as “unfair” and

walked away with nothing Proposers anticipated this response, and actually

made “fair” offers in the area of $5

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Altruism

The desire to help others The brain rewards altruism with a

pleasurable feeling Autism – people who can’t engage in

or understand social interactions with others

Results in inability to sympathize with others

Mirror neurons aren’t developed

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Resulting Decisions

Decisions feel “unanimous” to us However, most decisions are the

result of weighing multiple conflicting factors

Stimulate the NAcc and pacify the insula Prime with highly coveted items Use promotional stickers to make the

deal seem like a good deal Credit cards are less like “real money,”

therefore result in more purchasing

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Silencing cognitive dissonance

Brock and Balloun, late 1960’s Two groups – regular churchgoers,

committed atheists Played tape recorded message

attacking Christianity, with annoying static added

Listeners able to press button and remove static

Atheists removed the static, churchgoers did not - they each heard what they wanted

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Parable of Cognitive Dissonance

Jewish tailor story (Plous p. 22) The gang members tried to upset

the tailor; when he paid them, he said they were making him happy; when he reduced the payment, they couldn’t justify their behavior

People are motivated to reduce psychological inconsistencies

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Limitations of the Cortex

Cortex can only handle about seven data elements at once

Car buying involves dozens of features, options, etc.

Dijksterhuis categorized products with a complexity score Simple things like simple kitchen tools

(oven mitts) and home accessories (light bulbs) are easy

Complex things like furniture is very hard

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Results

With complex decisions, the longer people ponder them, the less satisfied they are with their decisions

The optimal strategy – use your rational mind to gather needed information, then don’t think about it – let your subconscious arrive at a good decision

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Impact of Society on Decisions

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Social Facilitation

Allport, 1954 and Zajonc, 1965 When observers are present, a

person performs simple, well-rehearsed tasks better

For complex or unmastered skills, the performance is worse

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Social Loafing

Moede (1927) People do not work as hard in groups

as they work alone When alone, individuals bear sole

responsibility for the outcome When in a group, responsibility is

shared (diffused) The larger the group, the more likely

that social loafing will occur

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People as Politicians

Social comparison theory – people evaluate their ability levels and appropriateness of their opinions by comparison with others

People tend to compare themselves with those who are most similar to them

This can lead to conformity Asch (1951) bar chart test

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Vocal Minority

Consistent vocal minority can have an impact on a larger group of people

This can happen even when minority group is not particularly powerful or prestigious

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Groupthink

Social pressures in a group to conform to the perceived consensus opinion of the group

Janis (1982) – eight common symptoms1. Illusion of invulnerability leading to overoptimism2. Collective efforts to rationalize3. Unquestioned belief in group’s morality4. Stereotyped views of adversaries5. Pressure directed at any new member who dissents6. Shared illusion of unanimity7. Self-censorship of deviations from group consensus8. Self-appointed “mind-guards” who protect the group

from external, divergent information

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Group Polarization

Group discussion leads to advocating greater risk taking than individuals would advocate

However, when the initial inclination of the group is toward caution, group discussion can lead to advocating greater caution than individuals would advocate

Called “choice shift”

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Group Judgments

Slightly better than individual judgments

Three person groups However, best individual in a group

tends to outperform the overall group

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Types of Group Judgment Five types of group decision techniques

Consensus – face-to-face discussion leads to agreement

Dialectic – group members required to discuss factors that might bias their decisions

Dictator – one member (hopefully best) makes judgments for the group

Delphi – iteration through a series of rounds Collective – no interaction among group

members; decision is simple average

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What Type Do You Think Works Best?

Class discussion

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What Type Do You Think Works Best?

Aggregation is the worst type

Dictator works best IFF best individual is chosen to be the dictator

However, dictator tends to modify decisions based on group consensus

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Decision Strategy Conclusions

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Decision Guidelines

Simple problems require reason Novel problems require reason Embrace uncertainty You know more than you know Think about thinking