The Psychology of Judgment and Decision Making

1
The Psychology of Judgment and Decision Making

• Ahmed Abbasi
• Jessica Bagger
• Daning Hu
• Xin Li
• Jon Marthaler
• Nicole Forsgren Meek
• Matthew Pearsall
• David Shimko
• Tao Wang
• Jerod Wilkerson

November, 10 2004
2
Chapter 1 Selective Perception
3
Summary

• Perceptions are heavily influenced by what we
  expect or hope to see
• Given past experiences and/or future desires, two
  people who are looking at the same thing may
  perceive it in very different ways

4
Example

• Most people do not see that this card is actually
  a black three of hearts they see it as a regular
  three of hearts or spades.

• Typical quote from an experiment subject
  confronted with this card I cant make the suit
  out, whatever it is. I dont know what color it
  is now or whether its a spade or heart. Im not
  even sure now what a spade looks like!

5
Lesson
Perceptions are heavily influenced by what we
expect or hope to see.
6
Chapter 2 Cognitive Dissonance
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Summary

• Cognitive dissonance is a difference between our
  motives and our actions (psychological
  inconsistency)
• People are usually motivated to reduce or avoid
  psychological inconsistencies
• It has been suggested that people only discover
  their own attitudes and other internal states by
  watching themselves behave
• Takes two forms predecisional and postdecisional
  dissonance

8
Example

• Famous study from Stanford University
• Undergraduates were required to do extremely
  tedious tasks for an hour
• They were then paid either 1 or 20 to tell a
  waiting student that the tasks were very
  enjoyable, then asked to evaluate how enjoyable
  they themselves found the task
• Those that were paid 1 rated the tasks as much
  more enjoyable!
• The students who were only paid 1 felt the need
  to rationalize their behavior. Those who were
  paid 20 already had their (monetary) motivation
  in hand and thus felt no such need to rationalize.

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Lesson
People may reconstruct their motives to reduce
cognitive dissonance.
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Chapter 3 Memory and Hindsight Biases
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Summary

• Memory is not a storage chest where we deposit
  memories for later recall
• Memories are constructed at the time they are
  recalled (they are not copies of past
  experiences)
• People fill in missing details with logical
  inferences and associated memories
• People are subject to hindsight bias (I knew it
  all along)

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Examples

• Close your eyes and recall a scene in which you
  experienced something pleasurable. Did you see
  yourself?
• When people viewed accident film clips, their
  estimates of car speed varied based on how the
  question was worded (How fast were the cars going
  when they hit verses smashed each other?)
• People who were asked about the cars smashing
  each other also remembered seeing broken glass
  (but there was no broken glass)
• People recalling a recorded discussion two weeks
  later omitted more than 90 of the specific
  points and almost half of what they remembered
  was substantially incorrect

13
Lesson
Dont believe everything you remember.
14
Chapter 4 Context Dependence
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Summary

• Four types of context dependence effects
• The Contrast Effect - Comparison of objects to
  other similar objects influences our perception
• The Primacy Effect - First impressions affect our
  judgments more than later impressions
• The Recency Effect - Our judgments can be more
  affected by things we heard recently (counteracts
  primacy effect)
• The Halo Effect - Favorable impressions of one
  trait result in increased impressions of other
  traits

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Examples

• Contrast Shapes compared to similar shapes of
  significantly different sizes changes our
  perception of the original shapes size (the
  effect diminishes as the similarity of the shapes
  is reduced)
• Primacy When people were given a list of
  characteristics of someone, the items early in
  the list affected their judgment of the person
  more than the items later in the list
• Recency When subjects were presented with court
  transcripts with pro or con sides first and the
  other last, their judgments reflected a recency
  effect when there was a delay between hearing the
  two sides of the case
• Halo Flight commanders showed a correlation
  between ratings of subordinates intelligence and
  physique

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Lesson
Our judgments are based partly on the context in
which we make them (there are no absolutes).
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Chapter 5 Plasticity
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Summary

• The way questions are asked affects the answer
• Question wording
• Question or alternative order
• On unfamiliar issues, people often give
  pseudo-opinions (opinions when they actually have
  no opinion)
• Can filter pseudo-opinions out by listing
  no-opinion as a possible response, or by asking
  them if they have an opinion before asking the
  real question
• People often demonstrate inconsistencies between
  their attitudes and their behaviors

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Examples

• In a Tide magazine survey 70 of respondents gave
  an opinion on a piece of fictitious legislation
  (the Metallic Metals Act)
• Darley and Batson found a significant
  inconsistency between seminary students
  attitudes about being a Good Samaritan and
  their actions (attitude didnt affect actions,
  but whether they were in a hurry did)

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Beliefs and behaviors are flexible, depending on
factors unrelated to the belief.
Lesson
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Chapter 6 The Effects of Question Wording and
Framing
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Summary

• Question wording affects the response
• Use of forced choice questions
• Open vs. closed questions
• Word choice
• Social Desirability
• Framing affects the response
• Wording in terms of a gain vs. a loss
• Decision makers frame choices and outcomes

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Examples

• Vietnam troop withdrawal survey was reversed when
  respondents were given a middle category
• Average number of reported headaches was higher
  when preceded by a question asking if respondents
  get them frequently vs. occasionally
• 27 of respondents endorsed opposite sides in
  the same surveyof a nuclear freeze question when
  both question were worded in a socially desirable
  way

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Survey results must be interpreted very
carefully (ask What answer did the surveyor
want?).
Lesson
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Chapter 7 Expected Utility Theory
27
Summary

• Expected utility theory is intended to describe
  how people would behave if they followed certain
  principles of rational decision making.
• Six principles
• Order of alternatives
• Dominance
• Cancellation
• Transitivity
• Continuity
• Invariance
• Extensions of expected utility theory
• Subjective expected utility theory (decisions can
  be based on subjective probabilities)
• Stochastic models (preference for soup one day
  and salad the next)

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Examples

• St. Petersburg Paradox
• Daniel Bernoullis utility and wealth
  relationship model by assuming that the value of
  additional money declined with the wealth, Daniel
  Bernoulli was able to show that the expected
  utility of the St. Petersburg game was not
  infinite after all

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Lesson
People often make irrational decisions.
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Chapter 8 Paradoxes in Rationality
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Summary

• Violations of the Cancellation Principle and the
  Transitivity Principle of expected utility theory
• Violations of expected utility theory dont mean
  that the way people make decisions is
  unreasonable

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Examples

• Decision rules for recruiting
• Rule 1 if the difference in intelligence between
  any two applicants is greater than 10 points,
  choose the more intelligent applicant
• Rule 2 if the difference in experience between
  two applicants is equal to or less than 10
  points, choose the applicant with more experience

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Lesson

• In the real world, there are many cases in which
  decision makers violate the principles of
  expected utility theory
• The approximations subjects follow in order to
  simplify the difficult task of bidding might
  prove to be rather efficient, in the sense that
  they reduce cognitive effort and lead to outcomes
  not too different from the results of optimal
  strategies
• Expected utility theory does not adequately
  describe how people make decisions

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Chapter 9 Descriptive Models of Decision Making
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Summary

• Prospect theory
• Replaces the notion of utility with value
• The value function for losses is convex while the
  value function for gains is concave
• Recognized as extended version of classical
  expected utility theory
• Regret theory
• Two assumptions
• Many people experience the sensations called
  regret and rejoicing
• In making decisions under uncertainty, people try
  to anticipate and take account of those
  sensations
• Reaches the same conclusion, risk aversion, as
  predicted by prospect theory
• Add a new variable, regret, which could explain a
  lot of the paradox

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Examples

• Kahneman and Tverskys experiment, 1979
• Experiment 1 design
• Alternative A a 50 percent chance of gaining
  1000
• Alternative B a sure gain of 500
• Experiment 1 result
• Of the 70 respondents who were given this
  problem, 84 percent chose the sure gain.
• Experiment 2 design
• Alternative C A 50 percent chance of losing
  1000
• Alternative D A sure loss of 500
• Experiment 2 result
• Nearly 70 percent of those surveyed chose the
  risky alternative

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Lesson

• The first thousand dollar gain has more value
  than the second thousand dollar gain
• If an outcome is viewed as a gain, the decision
  maker will tend to be risk averse on the other
  hand, if the outcome is viewed as a loss, the
  decision maker will be risk seeking

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Chapter 10 The Representativeness Heuristic
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Summary

• Heuristics are rules of thumb that can be
  useful time saving estimators, but often lead to
  biases.
• Representativeness When people judge
  probabilities by the degree to which A resembles
  B people feel that the more specific event is
  more probable than the more general event.
• Biases usually occur when people ignore base
  rates, which is the relative frequency with which
  an event occurs.

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Examples

• Linda the bank teller
• Alternatives
• Linda is a bank teller
• Linda is a bank teller and is active in the
  feminist movement
• Results nearly 9 out of 10 respondents chose the
  second alternative
• Biases Readers believe that it is more likely
  that Linda is both a bank teller and feminist
  than just a bank teller.

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Lesson

• Dont be misled by highly detailed scenarios.
• Pay attention to base rates.
• Be skeptical about the conclusions you arrive at
  from the heuristic

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Chapter 11 The Availability Heuristic
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Summary

• The availability heuristic a rule of thumb in
  which decision makers assess the frequency of a
  class or the probability of an event by the ease
  with which instances or occurrences can be
  brought to mind
• Availability leads to biased judgments when
  examples of one event are inherently more
  difficult to generate than examples of another

44
Examples

• Tversky and Kahnemans experiment
• Experiment question In a typical sample of text
  in the English language, is it more likely that a
  word starts with the letter K or that K is its
  third letter (not counting words with less than
  three letters)?
• Experiment results of the 152 people who were
  asked this question, 105 thought that words with
  the letter K in the first position were more
  probable.
• Which is more the likely cause of death in the
  United States a car accident or stomach cancer?

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Lesson

• The availability heuristic is the central
  probability and frequency estimator among all
  heuristics.
• In some cases, the availability heuristic leads
  to critical biases in judgment.
• One way to correct this problem is by explicitly
  comparing over- and underestimated dangers with
  threats that are misperceived in the opposite
  direction.

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Chapter 12 Probability and Risk
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Summary

• Probability and risk are everywhere
• Risk is often difficult to quantify
• Probability estimates are also influenced by the
  valence of an outcome

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Examples

• David Rosenhan and Samuel Messicks experiment,
  1966
• Question Subjects were asked to guess on each of
  the 150 trials whether the card would show a
  smiling face or a frowning face when it was
  turned over.
• Results ?

68.2
57.5
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Lesson

• Maintain accurate records
• Beware of wishful thinking
• Break compound events into simple events

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Chapter 13 Anchoring And Adjustment
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Summary

• Coined by Tversky and Kahneman to explain a
  phenomenon in their research in 1974.
• When asked, is the percentage of African
  countries in the UN higher or lower than a
  certain number
• If the number was 65, the average estimate would
  be 45
• If the number was 10, the average estimate would
  be 25
• Insufficient adjustment up or down from an
  original starting value

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Examples

• Mathematical predictions
• Quick estimate of 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1
• The average estimate is 2250
• Quick estimate of 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8
• The average estimate is 520
• The correct answer is 40,320

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Lesson

• When creating a questionnaire, it is important to
  avoid anchoring.
• If you are to use an anchor, use both a low and a
  high anchor.
• Not avoiding suggested values will likely produce
  judgment bias.

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Chapter 14 Randomness
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Summary

• Belief in Randomness
• Research shows that people will see an ambiguous
  series of events as being more structured than it
  really is.
• Unlikely events can be seen as acts of God or
  miracles.
• People have a hard time behaving randomly, but it
  can be learned.

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Examples

• An example from the book was a George D Bryson
  that booked into a hotel to find that the
  previous tenant was also named George D Bryson.
• One may say that the chances of that happening is
  one in a million.
• However, is likely that two successive occupants
  of some room in some hotel in some city at some
  point will have the same name.
• Take any of the variables away and the
  probabilities drop dramatically.

57
Lesson

• It is important to
• keep in mind that coincidences do occur.
• attempt to avoid seeing patterns that do not
  exist.
• state probabilities in the proper context

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Chapter 15 Correlation, Causation, and Control
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Summary

• Most people have difficulty assessing covariance
• Uneventful events events that do not occur are
  equally important in understanding relationships
  between variables
• Illusory Correlation attributing correlation
  between 2 unrelated variables.
• Invisible Correlation failure to see
  relationship that exists between 2 variables.
• Causalation the inferential leap that
  correlation causation.

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Examples

• Uneventful Events
• Sherlock Holmes and The Silver Blaze mystery
• Illusory Correlation
• Use of inkblot tests to detect male homosexuality
  (Chapman and Chapman, 1969)
• Invisible Correlation
• College students could not detect relationship
  until correlation values were extremely high
  (Jennings et. al 1982)
• Causalation
• Advertising almost doubles your ROI

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Lesson

• Very pertinent to analyzing experimental results.
  Must beware of
• Assigning relationships between variables where
  none exist
• Failing to detect relationships
• Assuming relationship means causality

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Chapter 16 Attribution Theory
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Summary

• Analysis of Variance Framework (Kelley 1967)
• Consensus, Distinctiveness, and Consistency used
  for attribution
• Problems (Attribution Biases)
• Consensus information (base rate) ignored.
• Studies show that more available, vivid, and
  salient events appear to have greater probability
  and causality
• Fundamental Attribution Error
• Bias of dispositional factors (abilities, traits)
  over situational factors (temperature, time)
• Other Biases
• Self-serving bias (successme, failure you)
• Ego-centric bias accepting greater credit for
  joint task

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Examples

• Fundamental Attribution Error
• Good Samaritan?
• Observers attributed helping behavior to
  religiousness (dispositional) rather than
  hurriedness (situational)
• Power of Salience
• Two Man Conversation
• Six observers in 3 vantage points used visual
  salience as criteria for determining whom set
  the tone of the conversation

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Lesson

• Avoid attribution biases
• Pay attention to consensus data and base rates
• Look for hidden causes (such as question framing)

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Chapter 17 Social Influences
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Summary

• Because people are social by nature, their
  judgments and decisions are subject to social
  influences
• Some of these influences will not affect
  underlying judgments, but will influence
  decisions
• Subjects can be influenced without recognizing it

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Examples

• Social facilitation
• Pool playing
• Social loafing / Diffusion of responsibility
• Tug-of-war
• Bystanders
• Social Comparison
• GroupSystems comparison line
• Groupthink
• Bay of Pigs
• Conformity
• Asch comparison lines

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Lesson

• Be consciously aware of the influence that others
  will have on your subjects responses
• To avoid groupthink
• Group leaders encourage criticism appoint a
  devils advocate
• Group leaders should not state preferences
• Group members should discuss deliberations with
  others and report back to the group
• Invite outside experts or qualified colleagues

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Chapter 18 Group Judgments and Decisions
71
Summary

• Individual biases also present in groups, such as
  group attribution error and group-serving
  bias
• Strong in-group, out-group effects
• Groups tendencies are often polarized leading to
  risky shift
• Group performance depends on aggregation method

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Examples

• Risky shift Group members perceive events as
  more or less risky than individuals after
  discussion depending on group composition

73
Lesson

• Things to remember
• Group discussion generally amplifies existing
  tendencies
• Groups generally perform better than the average
  individual in the group
• Groups generally perform worse than the best
  member of the group, depending on task
• Group leadership style influences performance

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Chapter 19 Overconfidence
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Summary

• Overconfidence is a belief in ability or
  understanding that adversely affects a decision
• People are usually overconfident regarding their
  judgments, especially if correct judgments are
  hard to make
• Usually happens when accuracy is near chance
  level

76
Examples

• Experimental settings When rating own accuracy
  levels, psychologists, grad students undergrads
  all overstate their accuracy level
• Space Shuttle Challenger Accident (January 28,
  1986)
• Attack on Pearl Harbor
  (December 7, 1941)

77
Lesson

• Consistent decision feedback can reduce effects
  of overconfidence
• When working with model, system, etc., never
  assume it is perfect always look for problems or
  bugs to make improvements
• Although you may have uncovered what you believe
  is cause and effect, dont generalize to
  broadly (dont be too confident that your results
  generalize)

78
Chapter 20 Self-fulfilling Prophecies
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Summary

• Self fulfilling prophecy is a false definition of
  the situation evoking new behavior which makes
  the originally false conception come true
• People seek confirming evidence rather than
  disconfirming evidence
• Hard to get rid off

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Examples

• If you expect some students to be the high
  achievers, the extra attention they receive from
  you will help them achieve more on average
• Male subjects who thought they talked with a
  physically attractive woman judged her as more
  sociable, humorous, etc.

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Lesson

• Be aware that your behavior may influence your
  research in the direction that you want it to
  (e.g., Pygmalion Effect)
• Be aware that you may pay more attention to the
  evidence that supports your hypotheses (even if
  unconsciously)

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Chapter 21 Behavioral Traps
83
Summary

• A situation where individuals or groups embark
  on a course of action that later becomes
  difficult to escape from. There are 5 general
  types
• Time delay traps
• Ignorance traps
• Investment traps
• Deterioration traps
• Collective traps

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Examples

• Time delay nighttime guy vs. morning guy
• Ignorance DDT
• Investment sunk costs
• Deterioration heroin addiction
• Collective traps prisoners dilemma, tragedy of
  the commons

85
Lesson

• Gather information about the costs of entrapment
• Set limits and reevaluate costs of continuing
• Do not make commitment to continue
• Do not allow irrational feelings to escalate
  commitment or evaluate outcomes