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Decision Making

Hello and welcome, So, I will talk about decision making in this lecture as well ah, but I will kind of trail evaluate the kind of the ways in which we approach making decisions. So, making of decisions practically implies choosing off between courses of action. What do you want to do? Should I go for this or should I go for that, youknow things about choices of career choice about marriage buying a particular kind ofa car buying a particular kind of house or not, and the idea is that we are kind of evaluatingthese choices and we try and actually ah pick up the ones that are more useful for us, thathave the more utility for us ok that is at least what initial assumption is.So, let us discuss a little bit about how people approach decisions, where the mostcommon approaches is called the utility approach. So, the expected utility approach or the expectedutility theory is based on the assumption that people are basically rational beings.So, if they have all of the relevant information that is required to make a decision, theywill end up making decisions that will maximize the utility ok. In economics utility is referredto as monetary value. So, the idea is that if there is money ah sort of a decision involved,ah people will make such a decision that will ah kind of magnify the monetary output ascompared to you know losing money or something like that.The utility approach specifies procedures that make it possible to determine which choicewould result in the highest monetary value. For example, if we know the odds of winningwhen playing in a in a slot machine, and we know about the cost of playing how much youare going to put, each time you play and the size of the payoff that you know what is thepayoff like it is it will be possible to determine the fact that, in the long run playing ina casino or playing against a slot machine would always result in a losing position.In the in the long run you will lose money instead of gaining money for; however, timeyou play. But the fact is just because it is possible to predict the optimum strategydoes not really mean that people really follow the optimal strategy you know its just thatmathematically this is correct and I know it, but I still do something which is notoptimum. And in today's lecture we will try and seewhy you know why and what kind of a ah processes intervene ah in us making decisions whichare not optimal . So, people regularly behave in ways that ignorethe optimum way of responding to probabilities. Even though people realize most people realizethat in the long run the casino is actually the winner, the you know the huge popularityof gambling indicates that people decide to patronize casinos anyway. You know ah peoplein the long run know that you know a high consumption of alcohol would lead to diseasesand stuff like that, ah high consumption of you know junk food would lead to disease justlike it, but these things are anyways popular and people are using it and they are you knowpopular getting popular by the day. So, observations ah such as the ones I wastalking about, have basically led psychologists to assume to conclude that people do not alwaysmake decisions ah that result in the desired outcome. What people do not always make decisionsthat optimize or maximize the utility or monetary value; let us look at some of the other aspects.For example Denes Raj and Epstein. Epstein basically in 1994, they offered participantsthe opportunity to ah earn up to dollar 7 by receiving one dollar every time they drewa red jelly bean from a bowel consisting of red and white jellybeans. And there were twoballs one had one red and 9 ah white jellybeans and the other had seven red and 93 ah whitejelly beans. It was shown that a lot of people actually chose the longer bowl ah the largerbowl even though the probability of selecting ah you know a red bean in the larger bowlwas around 7 percent well as in the smaller bowl it was around 10 percent.So, a lot of participants you know when they were asked to explain they reported that eventhough they knew that the probabilities were against them when they take the larger bowl,they have somehow felt as if they had you know a better chance if there were more redbeans. You know something is there which kind of is overpowering you know their basic rationaljudgment. So, this is interesting, similar to this also I mean you can take another examplethat passengers preferring to travel by a road instead by air, sort of thing they youknow there is there is a better chance of surviving without an accident if I am travellingby road as compared to by air, but the actual data says that more people die in road accidentsas compared to people dying in air accidents. So, again this is ah also something that peopleare ah following ah while they are ignoring things like base rate and things like youknow what is a more probable or not. Post and coworkers they analyze the contestantsresponses and they analyze their responses, across 100s of games and they concluded thatthe contestants choices are determined not just by the amounts of money that is leftin the suitcases or in the beds ah, but where also what has happened leading to their decision.Till a point I am coming to make decision what some whatever has happened in the pastalso in some sense will influence whether I will make this better or not. Whose foundthat if things have been going well for the participant and the at the end the bank youknow begins offering more and more, the contestant kind of gets more and more conscious and youknow they would accept a deal early. In contrast when contestants are doing poorlyand the bank offers go down, they are more likely to keep on playing. Suppose in a gamblinggame, if you have been meaning more more and more and you know they ah there is more andmore higher bets on the thing, you would at some point get a bit more cautious you knowyou are kind of afraid of losing this much. On contrast if you have been losing more andmore and you kind of almost have nothing left you would be tempted to play more becausein some sense you are hoping that maybe at some point I will win which will kind of overpowerall my losses. This is again simple way how decision makingsometimes operates. So, post suggests that one of the reasons for this behavior in theparticipants ah you know who are doing poorly, and they are continuing to play is the factthat they want to avoid the negative feeling of ending up as a loser.So, the gambler kind of goes on, gambling because at the close of play he does not wantto be termed as a loser, he wants to kind of you know end the balance sheet not in red,but you know in green. So, therefore, they they keep playing they keep taking more andmore risks in the hope of beating the odds and coming out ahead in the end.And this is very interesting this is kind of counterintuitive in some sense, but itis rather interesting. What might be playing its role in this; I think emotions play avery big role. So, emotions and there is a lot of research which has shown that emotionsdo affect taking of decisions in a variety of this, we will talk a little bit about emotionsnow. So, one of the kind of emotions I could talkabout is expected emotions. Expected emotions is what people predict they will feel aftera particular outcome. For example, a deal or no deal contestant might think about achoice in terms of how good he or she will feel when they win dollar 100 25000 ah youknow in accepting the banks offer and they also compare it how great he or she will feelah if she wins dollar 5000, but also how bad he or she will feel if she does not acceptthe banks offer and ends up losing. So, if the bank is offering a lot of money they willcompare that what happened what will I feel if I accept this offer and I bring it theyalso compare what happens if I reject this offer and I lose the money. So, the idea iswhat will I you know look like ah if I have lost what will I feel like if I have lostrather. An interesting fact here is that while expectedemotion does provide some information about probable emotional outcomes you know, it doesnot really involve actually feeling you are just hoping that I will feel. So, I feel veryhappy or I will feel very bad if I am lost. Once that point you know, once that bridgeactually comes its its very different its very difficult to really imagine what youare going to feel and you know these two things might not really have a a close correspondencebecause expected emotion is expected emotion you are not feeling that emotion at that pointin time. So, because emotion also potentially providesinformation, this means that expected information expect a part of the utility approach youknow they can tell you something they can be a factor in making the utility decision.Because an outcome that results in a positive emotion will likely be considered a good outcomeand one that results in a negative emotion will likely to be you know treated as a pooroutcome. So, you kind of you can factor this in your utility decisions.On the other hand you can talk about immediate emotions. Now immediate emotions are emotionsthat are experienced at a time the decision is being made you know when you are actuallygoing to press the button. Now, there are two kinds of immediate emotionsthat we can talk about. The integral immediate emotion is the emotion that is associatedwith making this decision, whether I am making the correct decision, whether I am makingthe incorrect decision, how anxious I am feeling because this is such a heavy choice to makehow happy that I am feeling is this is a relatively ah benign choice to make.So, for example, deal or no deal contestant again I am taking the example of this game,ah you know who is deciding whether to accept or return the banks offer, might be feelingextremely anxious because this is such a lot of money involved. This anxiety is referredto as the integral anxiety or integral emotion and can play a very important part in affectingthe decision. The other immediate emotion that we can talkabout is the incidental immediate emotion. Now incidental immediate emotion is not reallyassociated with the task of making the judgment, its basically how the person has been feelingthroughout the day you know how is the person generally. If I am generally ah a risk lovinghappy go lucky kind of a person or I am generally a very cautious person, and I am generallyvery you know conservative in making these choices. So, incidental emotions again canbe caused by a person's general disposition as I was saying or they would also be ah youknow because of the fact that something good happened earlier in the days I am thinkingthat my day is good I am going to make a heavy decision or something bad has happened earlierin the day, I am thinking and maybe the day is already going bad I will take a more consciouscautious decision ah here. So, this is also something that will playa part. Now each of these type of emotions. Expected emotions, integral emotions and incidentalemotions can potentially have an effect on how or what kind of decisions I am going tomake. But only expected emotions which involves some element of rational thought can be handledwithin the expected utility frame because others other two things there is no logicah of how you will arrive at those things .So, let us you know go further with how emotions are going to affect decision. So, one of thefactors is that people sometimes in accurately predict their emotions. A basic characteristicof research on decisions basically shows that there is a phenomenon called risk aversion.And there is aversion phenomena is the tendency to avoid taking risks for example, a dealor a no deal contestant who decides to accept the bankers offer rather than take a chanceon winning big or losing, it all may be motivated by risk aversion.You know you do not want to lose everything that you have. So, you want to avoid the riskand you just accept the banks offer and close the play. Expected emotions are one of themajor determinants of risk aversions because one of the things that increase the chanceof risk aversion is the tendency that a particularly be rated as highly negative you know ah youwill assume that if I lose this I will feel so bad, that I should not lose this and Ishould take the more cautious choice I should be the more you know conservative choice maker.For example let us take a real example if people ah you know if people believe it wouldbe very disturbing to lose dollar 100, but only slightly pleasant to win dollar 100 andthis would cause them to decline a bet for which the odds are fifty- fifty suppose thereis a coin toss and dollar 100 for ah you know heads dollar 100 for tails, I have to giveyou dollar 100 if you win you have to give a dollar 100 if you lose ah its fifty-fifty,but because people think that you know losing dollar 100 is much more ah bad somewhere towinning dollar 100 they will not take such kind of a bet.In fact, because of this effect some people are reluctant to take a fifty-fifty bet inwhich winning pays dollar 200 and losing pays dollar of 100 even though in a accordancewith the utility theory ah. This basically should be the same Kermer andcoworkers in 2006 they wanted to study this effect by doing an experiment and come theybasically wanted to compare peoples expected emotions with their actual emotions what theyexpected and what they actually felt they gave my participants dollar 5 and then theytold them that based on a coin flip, they would either win another dollar 5 or theywould rule ah loose dollar 3 out of what they have this dollar 5. Participants were askedto rate their happiness before the experiment started and they predicted how their happinesswould change if they win the coin toss the results of these ending.So, I will show you the results in in a way, you will see that participants basically ratethat they would you know they ah negative on dueling on losing dollar 3 as comparedto ah they feel much less positive if they win another dollar 5.Here you can see, you see that you know participant ah they rate losing dollar 3 has much morenegative as compared to winning dollar 5. After the coin toss has happened in whichsome parts one and some loss, they carried out a filler task for 10 minutes and thenthey were asked to rate their happiness once again.The bars on the right side here actually show that they actually did feel more positiveon winning dollar 5 and they felt much less negative as compared to what they had estimatedbefore the coin toss. They felt much less negative about losing dollar 3 now. So, yousee there is a gap between expected emotions and actual emotions that are being felt, andone wonders you know how this kind of things operate and you know affect our decision making.Certainly we somehow overestimate the you know the we over estimate the cost of losingsomething the cost of the negative outcome we over estimate that how bad we are goingto feel . So, why why do people overestimate their negativefeelings what could be the reason? One of the reason is that when making their predictions,they do not really take into account the various coping mechanisms that they have you know,even if you use that you have family, you have this, you have that and this should helpyou to deal with adversity. Sometimes people do not take these things into account forexample, a person who does not get a job he ah wanted might be able to rationalize thefailure by saying the salary was not really what I wanted. These results ah show thatyou know there there is this inability to correctly predict the actual emotional outcomeof the decision and that is what is leading people to make so many of the wrong decisions,because they are ah overestimating negative outcomes.Let us talk a little bit about how incidental ah emotions might affect decisions. So, whathappens is, there is a lot of evidence that that shows that decision making is also affectedby incidental emotions even though they are not really directly related to the decision.A very good example is say that there was a paper titled clouds make nerds look good.ah Simonsohn in 2007, he reported an analysis of university admission decisions, ah in whichhe found that applicants ah academic attributes were more heavily weighted on cloudy daysthan on sunny days. So, in cloudy days basically you know ah nerds ah by this paper, ah theiracademic attribute attributes were given much more weight as compared to their other attributesyou know personality and so on and so forth. In another study he found that prospectivestudents visiting an academically highly rated university were more likely to enroll if theyhad visited a campus on a cloudy day. There again there this I mean their rating of theuniversity is also kind of influenced by these things.In a different study by learner and colleagues in 2004, participants viewed one of 3 filmclips ah calculated to elicit emotions, they saw a person dying and they saw a person usinga dirty toilet, and they saw a fish at the great barrier. If 3 kind of cliffs they wereseeing participants ah in the sadness and disgust groups were also asked to write abouthow they would feel if they were you know they were in the same situation, how wouldthey feel that you know if they were involved you know ah in the dying thing or they wereinvolved in using the dirty clip or they were actually seeing a seeing fish at their reef.Learn learner and coworkers found and they basically then gave participants highlighterset, and they determine the price for which ah.So, again this is not related we are talking about manipulation of incidental emotion thetask is something else. So, learner and coworkers then the participants a highlighter set andthey determined the price for which the participants would be willing to sell the set. So, theywere given this and there are that how much you will sell this for and the price thatthey would be willing to choose the set instead of accepting money. So, you know well theywill not choose not part with the set and refused the money. The choice condition isroughly equivalent to setting the price they would pay for it you know, its just like aslike how much would you pay for it. The results show that participants in thedisgust and sadness conditions were willing to sell this set ah for much less than theneutral group. So, there were 3 groups one was the neutral group, one were the sad groupand the disgust group, they were because their incidental emotions were generally on thenegative side they just wanted to part with the set and the kind of were agreeing to sellthe set for much less as compared to the neutral set neutral group.Then I suggest that this is occurring because disgust is associated with the need to expelthings, and sad emotions are associated with the need for change. So, both of these emotionseven though they are not really you know directly involved in the pen or highlighter sellingtasks, they are in some sense affecting how people are making these decisions. It is alsokind of fits with the idea that sadness is being associated with the need of change theproposed reasons behind this setting ah and setting of buying and selling prices are kindof hypothetical at a hypothetical at this point, but whatever the reasons be the resultskind of show that you know peoples moods may really affect their decisions at least thatmuch you can take away from this. And here is ah the 3 groups neutral disgustedinside and you will see you know the kind of differences in price you will see thatthe neutral group is selling for much higher price than the disgusted entire groups, andsimilarly ah in in the other case. The choice to buy the ah sad group is willingto pay more ah in in in that sense ok ah. Now, we talked about expected emotions, wetalked about incidental emotions, ah decisions other than emotions can also be affected byhow the choices are presented. You know what kind of way you present the choices to peoplethat could also affect. So, for example, how the wording of the problem can influence adecision and this was demonstrated by a slovic and coworkers in 2000. They showed forensicpsychologists and psychiatrists a case history of a mental patient, and this mental patientwas named misses Jones and they asking to judge the likelihood ah that the patient wouldadmit ah would commit an act of violence within 6 months of being discharged.The key variable in the experiment was the nature of a statement that presented the informationabout various cases. When they were told 20 out of every 100 patients similar to missesJones estimate are estimated to commit an act of violence, 41 percent refused to dischargedischarge message shows on. The second case what is happening is whenthey were told that patients similar to misses Jones are estimated to have a 20 percent chanceof committing an act of violence, only 21 percent refused to discharge. So, the ideais because you are framing it differently, ah it seems that you know if you are presentingthey are likely the larger likelihood that this person will commit an act of violence,then people are not revealing to this charge if you are committing if you are presentingin such a way that you know there is less likelihood that this person will commit violence,then more people are willing to discharge. Why is there such a difference, why is thisreally happening? Its possible there the first statement conjures up images of 20 peoplebeing beaten up, where the second is a more abstract probability statement that couldbe interpreted to mean that there is only a small chance that where people like missesJones will be violent. So, you you can actually just look at thisagain, the first statement is 20 out of every 100 ah ah patients similar to misses Jonesare estimated to commit an act of violence. And the other is patients similar to missesJones are estimated to have a 20 percent chance of committing an act of violence. So, thepercentage is kind of similar, but its basically in terms of here also we are talking about20 there also we are talking about 20, but there we are talking about 20 of 100 whichis a more tangible thing. Here in the second signal we are just talking about an abstractprobability, which kind of probably makes it less likely that this will happen you know20 percent out of 100 percent is much lesser as compared to 20 percent ah 20 people gettingbetter ah. Another example. So, imagine that you knowand this is an example from goldsteins book, imagine that United States is preparing foran outbreak of an unusual disease that is expected to take 600 people. Two alternativeprograms to combat these diseases have been proposed, assume that the scientific estimatesof the consequences are as follows. If program A is adopted 200 people will be saved; ifprogram B is adopted there is a 1 by 3 possibility that 600 people will be saved at a 2 by 3possibility that nobody will be saved, which of the two programs would you favor?Now, in a different setting ah consider the following additional proposals for the samedisease, if program C is adopted 400 people will die, if program B is adopted there isa 1 by 3 possibility that nobody will die and 2 by 3 possible 2 by 3 ah possibilityah that 600 people will die. Now, you see that A and B statements and Cand D programs are kind of very similar to each other, but when participants are offeredthe first pair of the proposal seventy two percent of the participants in an experimentTversky and Kahneman chose program A and the rest chose program B.The choice of program A basically reflects the risk aversion strategy. In the secondone ah when the when Tversky and Kahneman presented programs C and D to a differentgroup of participants 22 percent picked program C and 78 percent picked program D.Now, this is basically the risk taking strategy, if you again look at this. if program d isadopted there is a 1 by 3 probability that nobody will die and 2 by 3 probability that600 people will die. 1 by 3 probability that nobody will die is a risk kind of a scenarioeven though the odds are kind of similar, but the risk taking strategy is ah in invokedbecause the program d is framed in a particular way.Now, Tversky and Kahneman concluded that in general when a choice is framed in terms ofgains, people use a risk aversion strategy and when a choice is framed in terms of lossespeople use a risk straight taking strategy then we can liken this to the gambler examplethat I was talking about. But if we look at more closely we will know that a and c bothresulted in the death of yeah, that is what I was saying ah A and C both result in thedeath of 400 people and 200 people are saved yet 72 percent of people are picking up Aover B. Similarly, C and D are exactly the same, butyou know you see ah 70 percent people ah take D and you know some of them a lot of themwe leave out A. So, this is referred to as the framing effect, the framing effect basicallysays that decisions and how you are going to make a decision is influenced by the wordingor by the framing of the problem. Now, another aspect other than framing effectis the role of justification. To Tversky and Shafir in 1992 presented the following problemto a groups of students. They the pass group. So, there are two groups in the past groupwho are going to pass and the failed group the pass group saw the statement indicatingthat they passed the failed group saw the statement indicating that they had failed.So, just look at this example again borrowed from Goldstein, imagine that you have takena tough qualifying examination, it is the end of the semester you feel tired and rundownand you find out that you pass the exam or it is the end of the semester you feel tiredand rundown ah and you find out that you feel the exam, and you will have to take it againin a couple of months after the christmas party ahYou now have the opportunity to buy a very attractive 5 day christmas vacation packageto Hawaii at an exceptionally low price. The special offer expires tomorrow. Now the optionsare would you buy the package not buy the package pay a dollar 5 non refundable feein order to retain the right to buy the vacation package or the same exceptional price theday after tomorrow. The results for these two groups showed thatthere is no difference between the two groups, 54 percent in the past group and 57 percentin the fail group opted to buy the package. Now the interesting result must have happenedwhen a third group was given the situation, except these participants were told that theoutcome of the exam will not be available for two more days. So, what happens here?Only 32 percent of the participants opted for the package and 61 percent decided thatthey would pay dollar 5. So, that they could put off the decision making they are kindof linking the decision to whether they will pass or not you can see this here.Now, this is basically ah you know Tversky and Shafir suggest that, once students knowthe outcome they can assign a justification for buying or not buying. Failed studentswould say that okay I failed I just need to go ah go to the vacation come back and I willtry harder for the next semester the passed students will anyways use it as a option forrejoicing that I have succeeded I have passed and I should go away. The third group basicallyah do not have that justification yet and. So, they kind of want to put this off.So, I think this was all from me about this the various aspects of decision making, aboutthe various approaches that people make towards decision making, the emotions and utilityapproaches and so on and so forth. We have concluded our section on reasoning and decisionmaking next week we will begin with a new cognitive function.Thank you .