Week 6 Preference and Choice
Rational choice theory suggests that individual have preferences that are manifested in their behaviour. However, some researches suggest that individuals construct their preferences in process of thinking about their choice. (Slovic et al, 2006) We do make choices that are sometimes regretful if of course the wrong mode of evaluation is applied, that is the reason why we do sometimes spend enough time comparing between alternatives. Probability is taken into consideration for many decisions and the decision maker normally use expected value expected utility theory and this is in fact considered to be the most accurate choice strategy but also most effortful because it requires the use all information necessary and all alternatives.
It is believed that if the individual is aiming to achieve accuracy between alternatives they will require a considerable level of cognitive effort to do so. However, the studies with computer assimilation suggest that less effortless strategy cam also achieve accuracy but one should bear in mind that no single heuristics is accurate across all context. Kahneman and Tversky (1979) suggested that individuals evaluate outcomes as gains or losses from reference point which is normally the status quo. This generally means that individuals are loss averse and that losses appear larger than gains and most of our choices is evaluated in terms of their advantages and disadvantage relative to each other. (Hardman, 2009)
Monday 24 May 2010
Week 5 Decision Framing Effects
This weeks topic is about decision framing effects. When I looked at the heading I asked myself what is decision framing effect? According psychologists ‘‘framing effect’’ is observed when a decision maker’s risk tolerance, (as implied by their choices) is dependent upon how a set of options is described. Specifically, people’s choices when faced with inevitably identical decision problems framed positively (gains) versus negatively (losses) are often opposing. As suggested by the utility theory, the outcomes and associated probability is all that is needed to determine decision maker’s preference between events to the contrary to the principal of rational theory of choice. However, it is believed that many of us violate this principle. The study conducted by Kahneman and Tversky (1984) where they asked their participants to make decision about the terrible disease which is expected to kill 600 people. The participants have been given two alternatives to the problem.
A) 200 people will be saved (72%)
B) There is a 1/3 probability that 600 people will be saved and 2/3 probability that no people will be saved (28%)
As I expected many of their participants preferred the option where 200 lives will be saved. Framing effects is well known in the financial sector, for example insurance companies, and there is also evidence that positive and negative framing effects are associated with different levels of cognitive processing. Dunegan (1993), study with international company engaged in developing high technology engineering systems suggested that the positive frames stated that of the project undertaken by the team, 30 of the last 50 have been successful and the negative frame stated that of the projects undertaken by this team, 20 of the last 50 have been unsuccessful. The negative framing group allocated less money on the project and they also were more concerned in reducing the costs. (Hardman, 2009)
The question is whether or not framing is a reliable phenomenon. a meta-analysis conducted by Kuhberger (1997) suggests that framing is reliable phenomenon, however, outcome salience manipulation, which constitute a considerable amount of work.
This weeks topic is about decision framing effects. When I looked at the heading I asked myself what is decision framing effect? According psychologists ‘‘framing effect’’ is observed when a decision maker’s risk tolerance, (as implied by their choices) is dependent upon how a set of options is described. Specifically, people’s choices when faced with inevitably identical decision problems framed positively (gains) versus negatively (losses) are often opposing. As suggested by the utility theory, the outcomes and associated probability is all that is needed to determine decision maker’s preference between events to the contrary to the principal of rational theory of choice. However, it is believed that many of us violate this principle. The study conducted by Kahneman and Tversky (1984) where they asked their participants to make decision about the terrible disease which is expected to kill 600 people. The participants have been given two alternatives to the problem.
A) 200 people will be saved (72%)
B) There is a 1/3 probability that 600 people will be saved and 2/3 probability that no people will be saved (28%)
As I expected many of their participants preferred the option where 200 lives will be saved. Framing effects is well known in the financial sector, for example insurance companies, and there is also evidence that positive and negative framing effects are associated with different levels of cognitive processing. Dunegan (1993), study with international company engaged in developing high technology engineering systems suggested that the positive frames stated that of the project undertaken by the team, 30 of the last 50 have been successful and the negative frame stated that of the projects undertaken by this team, 20 of the last 50 have been unsuccessful. The negative framing group allocated less money on the project and they also were more concerned in reducing the costs. (Hardman, 2009)
The question is whether or not framing is a reliable phenomenon. a meta-analysis conducted by Kuhberger (1997) suggests that framing is reliable phenomenon, however, outcome salience manipulation, which constitute a considerable amount of work.
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