decision making under uncertainty: from heuristics and ...ewds.strath.ac.uk/portals/50/ias...
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Decision Making under Uncertainty: From Heuristics and Biases to Neuroeconomics
Hartmut LeutholdDepartment of Psychology
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Outline
Normative TheoriesDescriptive TheoriesHeuristics and BiasesDual-Process ModelsPreference, Valuation and Brain
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Assumptions
Psychology Economics[Neuroscience]
1 N(agents)
Limited processing powerTime constraintsDynamic cognitive-affective system Prior experiences shape expectationsUse of diagnostic information
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Will share values go up?
Can I trust the expert’s advice when making a risky
financial decision?
A fuel efficient car or a fancy sports car?
Organic or standard range products?
Judgment and Decision
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Judgments involve an evaluation along a single entity
→ how attractive is a person, how likely is X to occur?
“I decided against my better judgment …”
Decisions are defined by
a choice among at least 2 alternatives
expectation about potential outcomes
value of outcomes can be assessed
uncertainty – ambiguity and risk of outcome
Judgment and Decision
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Blaise Pascal Choose the option with highest Expected Value
risk neutral = indifferent between gamble and EV
risk averse = preference for sure payment to a risky
gamble of equal or higher EV
risk seeking = preference for gamble with lower EV
Coin flipping game: Head = £ 100 and Tail = £ 0,
Certain £ 49
Normative Theories
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Daniel BernoulliChoose the option with highest Expected Utility
→ psychological value assigned to outcomeconcave utility function implies that utility gained by receiving £50 is more than half the utilitygained by receiving £100
→ Perception of monetary value
depends on your current wealth
Normative Theories
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Herbert SimonBounded Rationality – models need to reflect the
properties and limits of the mind and environment
Kahneman & TverskyJudgment under uncertainty: Heuristics and biases
Prospect Theory (1979):
implies risk seeking for low-probability gains and high-
probability losses and risk aversion for reverse scenario
Descriptive Theories
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Which lottery ticket would you choose?
Heuristics and Biases
A 01 02 03 04 05 06 A 04 07 19 24 37 41
A 01 02 25 26 48 49A 05 10 15 20 25 30
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Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student she was deeply concerned with issues of discrimination and social justice and also participated in anti-nuclear demonstrations. Please rank the following statements by their probability (1-8).
(5.2) Linda is a teacher in elementary school(3.3) Linda works in a bookstore and takes Yoga classes(2.1) Linda is active in the feminist movement(3.1) Linda is a psychiatric social worker(5.4) Linda is a member of the League of Women Voters(6.2) Linda is a bank teller(6.4) Linda is an insurance salesperson(4.1) Linda is a bank teller and is active in the feminist movement
Heuristics and Biases
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Heuristics and Biases
RepresentativenessWe judge the likelihood of an entity in terms of how well it represents, or matches, a particular prototype
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AvailabilityIn English words, does k appear more often as the first or third letter?Which has more people – Cuba or Venezuela?
People estimate the frequency of an event or the likelihood of its occurrence “by the ease with which instances or associations come to mind”
Heuristics and Biases
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Memory
Which is the capital of France?
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AnchoringGroup A: Would you pay £25 to clean up River Clyde to maintain
fish population?
Group B: Would you pay £200 to clean up River Clyde to maintain fish population?
A + B: How much do you think would the average Glaswegian pay?
A + B: Please estimate the percentage of Glasgow residents who would pay £ 100.
An uninformative number biases judgment Priming effect - activation in working memory system?
Heuristics and Biases
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Evaluation of ExperiencesPatients who are undergoing a painful medical procedure (colonoscopy) report every 60 secs their experienced pain intensity. After the episode, they evaluate the global pain or discomfort.
Heuristics and Biases
From Kahneman & Frederick, 2006
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Evaluation of Experiences
Peak and end pain accurately predicted global evaluations and future choices, whereas the duration effect was small.
Episode is represented by a prototypical moment. Associated affective value substitutes the global target attribute.
Peak/end ruleDuration neglect
Heuristics and Biases
Redelmeier & Kahneman (1996)
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Heuristics and Biases
Framing effectDr. X tells his patient A that 10% of people diewhile undergoing the surgery. Dr. Z tells another patient B that 90 % survive while undergoing the surgery. Will A and B be equally open to surgery?
Affect heuristic – reliance on a state of feeling that represents a positive or negative quality such as “good” or “bad”
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Emotional Memory
From LaBar & Cabeza, 2006
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Heuristics and Biases
Framing effect (DeMartino et al, 2006)
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Two concurrently active systems, performing automatic (hot, intuitive) versus controlled (cold, rational) processing operations, compete for the control of behaviour.
Dual-Process Model
Name the ink colour of printed colour words
red - green - blue - black
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Dual-Process Model
MacDonald et al. (2000)
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Dual-Process Model
From Botvinick et al., 2001
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Dual-Process Model
From Lieberman, 2007
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Neuroanatomy
From Purves et al., 2008
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Dual-Process Model
From Lieberman, 2007
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Preference
Coca Cola – Pepsi Cola (McClure et al. 2004)VMPFC activity correlates with preference
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To guide our behaviour we rapidly evaluate themotivational consequences of eventsGehring and Willoughby (2002) study neuralcorrelates in a game situation: → expected value of monetary outcome is zero → same probability of gains and losses in long run
Choice and Valuation
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Medial Frontal Negativity (MFN) ~ motivationaloutcome of the event
0 ms = onset of outcome stimulus
Choice and Valuation
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Context effects on choicebehaviour → losses leadto risk seeking behaviour
Correspondence betweenrisk-taking behaviour andoutcome processing as reflected by MFN
Short-term adjustmentsin decision making
Choice and Valuation
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ReferencesDe Martino, B., Kumaran, D., Seymour, B., & Dolan, R.J. (2007). Frames, biases, and
rational decision‐making in the human brain. Science, 313, 684‐687.Gehring, W.J., & Willoughby, A.R. (2002). The medial frontal cortex and the rapid
processing of monetary gains and losses. Science, 295, 2279‐2282. LaBar, K.S., & Cabeza , R. (2006). Cognitive neuroscience of emotional memory: A
review of core processes. Nature Reviews Neuroscience, 7, 54‐64.Lieberman, M.D. (2007). Social cognitive neuroscience: A review of core processes.
Annual Review of Neuroscience, 58, 259‐289.MacDonald, A.W., Cohen, J.D., Stenger, V.A., & Carter, C.S. (2000). Dissociating the
role of the dorsolateral prefrontal and anterior cingulate cortex in cognitive control. Science, 288, 1835‐1838.
McClure, S.M., Li, J., Tomlin, D., Cypert, K.S., Montague, L.M., & Montague, P.R. (2004). Neural correlates of behavioral preference for culturally familiar drinks.Neuron, 44, 379–387.
Purves, D. et al. (2008). Principles of cognitive neuroscience. Sunderland, MA: Sinnauer.Redelmeier, D.A., & Kahneman,D. (1996). Patient’s memories of painful medical
treatments: Real‐time and retrospective evaluations of two minimally invasive procedures. Pain, 116, 3‐8.