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Thinking and Deciding 12: Choice Under Uncertainty

09/22/2013

Prominence and noncompensatory strategies

Often different decisions vary on many different attributes. Problems may occur when a single attribute is focused on to the exclusion of all others, even if those also are valued.

Other reversals: compatibility and evaluability

When given a choice between taking one of two bets with the same expected value (29/36 for $2 or 7/36 for $9), most people prefferred the first, and yet they gave a higher monetary value to the second bet. This may be because when giving a value to something, they anchored onto the “compatible” attribute, the $9, instead of taking into account the odds as well.

Regarding evaluability, it can be very hard to decide how much certain attributes are “worth.” If giving a value of some abstract or unknown attribute, a range or a comparison may be necessary to make an informed decision.

Effects of the options available on choice

In an experiment comparing two beers, X and Y, one has a better price, but the other has a better “quality rating, making it hard to choose between them. Introduce a beer Z that is totally inferior with higher price and lower value, and boom, X becomes the preferred option.

Mental accounting

Explains a variety of heuristics and biases due to our being naive loss and gains accountants. There’s the status quo (endowment) effect, omission and default bias, the neglect of opportunity costs, the extra-cost and sunk cost effects, and the trick reference prices.

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