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Psychological determinants of
human judgment & decision making.
Peter Ayton
Department of Psychology
City University London
Behavioral Decision Making
Behavioural Decision Research
Rationality? Irrationality?
Errors and illusions: Clues to hidden...
Hering Illusion
The red lines are perfectly straight (but not parallel).
Ebbinghaus Illusion
The circles are perfectly regular.
Circled Square
The square appears to bend outwards, but does not.
Orbison Illusion
This time the square appears to bend inwards.
Scintillating Grid
Illusory black dots appear in the white circles.
(The effect is more pronounced if you glance around th...
Café Wall
The horizontal lines are actually perfectly straight and parallel.
Dynamic Café Wall
This image has two perfect circles
Twisted Checkerboard
The large black and white squares are perfectly regular, but the small white squares cause them to ap...
Muller-Lyer illusion - adaptation to a rectangular world?
Ponzo Illusion
The two black rectangles are exactly the same size.
Ponzo illusion - sensitivity to a cue to depth - the downside of intelligent inference?
Which horizontal line is longer?
Ames Room illusion
Observer looks through
pinhole. Ceiling heights
and trapezoid window frames
are arranged to fool the
ob...
Visual illusions: Ames Room illusion:
ambiguous perspective
Values
Values
Separate versus comparative evaluation
Vendor H Vendor L
Exhibit 1. Drawings in Study 2
WTP prices for Vendor H’s and Vendor L’s Servings in Study 2
Evaluation M...
Vendor H Vendor L
Exhibit 1. Drawings in Study 2
WTP prices for Vendor H’s and Vendor L’s Servings in Study 2
Evaluation M...
Attributes of Two Dictionaries
Year of
publication
Number
of entries Any defects?
Dictionary A 1993 10,000 No, it’s like n...
Mean WTP values for Dictionary A and Dictionary B. The numbers
in parentheses indicate numbers of participants
A 24 (39)
2...
Evaluability
Chris Hsee (University of Chicago)
“To say that an attribute is hard to evaluate . . .
means that people do n...
Separate versus comparative evaluation
• Features that trigger clear sentiments in separate evaluation sometimes lose thei...
Separate versus comparative evaluation
• Features that trigger clear sentiments in separate evaluation sometimes lose thei...
Unsurprising Psychological Finding
Often people don’t know what they
like or how much they like it
The thesis of preference construction is that
we often do not know our own values and
must construct them “on the spot,” u...
Reason based choice
Shafir 1993
Imagine that you serve on a jury of an only-child sole-custody case following a messy
divo...
Reason based choice
Shafir 1993
Imagine that you serve on a jury of an only-child sole-custody case following a messy
divo...
Award Deny
Parent A 36% 45%
Parent B 64% 55%
People are looking for preferences that are easy to
justify
Shafir 1993
Reason based choice
Shafir 1993
Resort A: Resort B:
Average weather Lots of sunshine
Average beaches Gorgeous beaches and ...
Choose Reject
Resort A 67% 52%
Resort B 33% 48%
People are looking for preferences that are easy to
justify
Shafir 1993
Defining Value
Values are constructed during the elicitation
process in a way that is strongly determined
by context and h...
1. Compromise effect
Items can GAIN market share when new
options are added to the market when they
become the compromise ...
Example: Cheeseburgers
50% 50%
CONTEXT EFFECTS ON CHOICE
Example: Cheeseburgers
50% 50% 10%30% 60%
CONTEXT EFFECTS ON CHOICE
We often don’t know what we want until we see
it in some context.
Attraction effect
Introducing an inferior (decoy) item w...
Choice shares
Group 1
40%
N.A.
60%
Choice shares
Group 1 Group 2
40% 20%
N.A. 0%
60% 80%
D2
D1
Y
Z
X
Adding Z to the set of options
increases the probability that
X will be selected over Y.
Asymmetric Dominance
...
Reference dependence
• Sensations depend on reference point ‘r’
–E.g. put two hands in separate hot and cold water, then
i...
Values are often elusive and influenced by reference points…
Constructed Beliefs
How happy are you with your life in general?
How many dates did you have last month?
Happiness questio...
Ariely, D., Loewenstein, G. and Prelec, D. (2003).
Coherent arbitrariness:
People were asked for the last 3 digit number o...
Mean willingness to hear (in dollars) for the three annoying sounds.
The data is plotted separately for subjects whose ran...
Traditional Economics …
…assumes that prices of products in the market are determined by a balance
between production at e...
NYC taxi drivers
Camerer, Babcock, Loewenstein, & Thaler (2000)
Strategy: Set daily income target.
Stop working when targe...
Choice blindness (Johansson, Hall, Sikström & Olsson, 2005)
“Sleight of hand”: Most participants fail to detect that their...
56
The Ostrich effect
Karlsson, Loewenstein and Seppi (2009) found that, following market
downswings, investors are less l...
57
The Meerkat effect
Gherzi, Egan, Stewart, Haisley & Ayton (2014) find that investors increase their
portfolio monitorin...
Psychological determinants of human judgment & decision making
Psychological determinants of human judgment & decision making
Psychological determinants of human judgment & decision making
Psychological determinants of human judgment & decision making
Psychological determinants of human judgment & decision making
Psychological determinants of human judgment & decision making
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Psychological determinants of human judgment & decision making

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Professor Peter Ayton is deputy dean of Social Science at City University London and one of the foremost leaders in the realms of decision theory which is very relevant to our experiences online and of course in wider communications. Peter talks about our judgements and how rational thought (or rather lack there of!) comes into play. Plus there is a little bit about how compromise effects which cheese burger we decide to order!

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Transcript of "Psychological determinants of human judgment & decision making"

  1. 1. Psychological determinants of human judgment & decision making. Peter Ayton Department of Psychology City University London
  2. 2. Behavioral Decision Making Behavioural Decision Research Rationality? Irrationality? Errors and illusions: Clues to hidden processes. Visual and Cognitive
  3. 3. Hering Illusion The red lines are perfectly straight (but not parallel).
  4. 4. Ebbinghaus Illusion The circles are perfectly regular.
  5. 5. Circled Square The square appears to bend outwards, but does not.
  6. 6. Orbison Illusion This time the square appears to bend inwards.
  7. 7. Scintillating Grid Illusory black dots appear in the white circles. (The effect is more pronounced if you glance around the grid)
  8. 8. Café Wall The horizontal lines are actually perfectly straight and parallel.
  9. 9. Dynamic Café Wall
  10. 10. This image has two perfect circles
  11. 11. Twisted Checkerboard The large black and white squares are perfectly regular, but the small white squares cause them to appear distorted.
  12. 12. Muller-Lyer illusion - adaptation to a rectangular world?
  13. 13. Ponzo Illusion The two black rectangles are exactly the same size.
  14. 14. Ponzo illusion - sensitivity to a cue to depth - the downside of intelligent inference? Which horizontal line is longer?
  15. 15. Ames Room illusion Observer looks through pinhole. Ceiling heights and trapezoid window frames are arranged to fool the observer that she is looking into an ordinary room.
  16. 16. Visual illusions: Ames Room illusion: ambiguous perspective
  17. 17. Values
  18. 18. Values
  19. 19. Separate versus comparative evaluation
  20. 20. Vendor H Vendor L Exhibit 1. Drawings in Study 2 WTP prices for Vendor H’s and Vendor L’s Servings in Study 2 Evaluation Mode Vendor H’s Vendor L’s Separate evaluation S1.66 S2.26 Joint evaluation Source: Hsee (1998) S1.85 S1.56
  21. 21. Vendor H Vendor L Exhibit 1. Drawings in Study 2 WTP prices for Vendor H’s and Vendor L’s Servings in Study 2 Evaluation Mode Vendor H’s Vendor L’s Separate evaluation S1.66 S2.26 Joint evaluation Source: Hsee (1998) S1.85 S1.56
  22. 22. Attributes of Two Dictionaries Year of publication Number of entries Any defects? Dictionary A 1993 10,000 No, it’s like new Dictionary B 1993 20,000 Yes, the cover is torn; otherwise it’s like new Separate versus comparative evaluation
  23. 23. Mean WTP values for Dictionary A and Dictionary B. The numbers in parentheses indicate numbers of participants A 24 (39) 20 (38) 27 (39) 19 (39) A B B Attributes of Two Dictionaries in Hsee’s Study Year of publication Number of entries Any defects? Dictionary A 1993 10,000 No, it’s like new Dictionary B 1993 20,000 Yes, the cover is torn; otherwise it’s like newSource: Adapted from Hsee (1998)
  24. 24. Evaluability Chris Hsee (University of Chicago) “To say that an attribute is hard to evaluate . . . means that people do not know whether a given value on the attribute is good or bad . . .
  25. 25. Separate versus comparative evaluation • Features that trigger clear sentiments in separate evaluation sometimes lose their appeal in comparative settings • Features that are hard to assess in separate evaluation are sometimes easier to evaluate in comparative settings
  26. 26. Separate versus comparative evaluation • Features that trigger clear sentiments in separate evaluation sometimes lose their appeal in comparative settings • Features that are hard to assess in separate evaluation are sometimes easier to evaluate in comparative settings Without a direct comparison, the number of dictionary entries is hard to evaluate because the evaluator does not have a precise notion of how good or how bad 10,000 (or 20,000) entries is. HOWEVER, the defects attribute is evaluable because it translates easily into a precise good/bad response and thus it carries more weight in the independent evaluation. Most people find a defective dictionary unattractive and a like-new one attractive. BUT under joint evaluation, the buyer can see that B is far superior on the more important attribute, number of entries. Thus number of entries becomes evaluable through the comparison process.
  27. 27. Unsurprising Psychological Finding Often people don’t know what they like or how much they like it
  28. 28. The thesis of preference construction is that we often do not know our own values and must construct them “on the spot,” using not only our knowledge, feelings, and memory, but also many aspects of the current environment, including how the preference question is posed and what type of response is required.
  29. 29. Reason based choice Shafir 1993 Imagine that you serve on a jury of an only-child sole-custody case following a messy divorce. To which parent would you award sole custody of the child? Parent A Average income Average health Average working hours Reasonable rapport with the child Relatively stable social life Parent B Above-average income Very close relationship with the child Extremely active social life Lots of work-related travel Minor health problems
  30. 30. Reason based choice Shafir 1993 Imagine that you serve on a jury of an only-child sole-custody case following a messy divorce. To which parent would you deny sole custody of the child? Parent A Average income Average health Average working hours Reasonable rapport with the child Relatively stable social life Parent B Above-average income Very close relationship with the child Extremely active social life Lots of work-related travel Minor health problems
  31. 31. Award Deny Parent A 36% 45% Parent B 64% 55% People are looking for preferences that are easy to justify Shafir 1993
  32. 32. Reason based choice Shafir 1993 Resort A: Resort B: Average weather Lots of sunshine Average beaches Gorgeous beaches and coral reefs Medium quality hotel Ultra-modern hotel Medium-temperature water Very cold water Very strong winds Average nightlife No nightlife Imagine that you have to choose between two holiday resorts. Which resort would you choose/reject?
  33. 33. Choose Reject Resort A 67% 52% Resort B 33% 48% People are looking for preferences that are easy to justify Shafir 1993
  34. 34. Defining Value Values are constructed during the elicitation process in a way that is strongly determined by context and has profound effects on the resultant evaluation.
  35. 35. 1. Compromise effect Items can GAIN market share when new options are added to the market when they become the compromise or middle option in the choice set (Simonson 1989) Example: Cheeseburger CONTEXT EFFECTS ON CHOICE
  36. 36. Example: Cheeseburgers 50% 50% CONTEXT EFFECTS ON CHOICE
  37. 37. Example: Cheeseburgers 50% 50% 10%30% 60% CONTEXT EFFECTS ON CHOICE
  38. 38. We often don’t know what we want until we see it in some context. Attraction effect Introducing an inferior (decoy) item will create a simple comparison with one option and thereby make it appear superior CONTEXT EFFECTS ON CHOICE 2. Attraction effect
  39. 39. Choice shares Group 1 40% N.A. 60%
  40. 40. Choice shares Group 1 Group 2 40% 20% N.A. 0% 60% 80%
  41. 41. D2 D1 Y Z X Adding Z to the set of options increases the probability that X will be selected over Y. Asymmetric Dominance Z makes X “look good”
  42. 42. Reference dependence • Sensations depend on reference point ‘r’ –E.g. put two hands in separate hot and cold water, then in one large warm bath –Hot hand feels colder and the cold hand feels hotter • Where does r come from? –Default: Usually status quo or pre-experiment condition
  43. 43. Values are often elusive and influenced by reference points…
  44. 44. Constructed Beliefs How happy are you with your life in general? How many dates did you have last month? Happiness question first: correlation = .12 Dating question first: correlation = .66 "The Dating Heuristic"
  45. 45. Ariely, D., Loewenstein, G. and Prelec, D. (2003). Coherent arbitrariness: People were asked for the last 3 digit number of their social security number. Then listened to unpleasant loud noise and asked: “Would you listen again to the noise they just experienced (for 300 seconds) if they were paid the money amount they had generated from their social security number (e.g. 997=$9.97)?” Then they indicated their WILLINGNESS TO ACCEPT ($) to listen to sounds in exchange for payment. In each trial, after, subjects were shown both their own price and a random price. If the price they had given was higher than the random price, subjects continued directly to the next trial. If the price they set was lower than the random price, they received the sound and the money associated with it (the amount set by the randomly drawn number), and then continued to the next trial.
  46. 46. Mean willingness to hear (in dollars) for the three annoying sounds. The data is plotted separately for subjects whose random three digit anchor was below the median (low anchor) and above the median (high anchor). Error bars are based on standard errors.
  47. 47. Traditional Economics … …assumes that prices of products in the market are determined by a balance between production at each price (supply) and the desires of those with purchasing power at each price (demand ). This assumes that the two forces are independent and together produce the market price. BUT What consumers are willing to pay can easily be manipulated – consumers don’t have a fixed notion of their own preferences and what they are willing to pay. Anchoring shows that the two forces are dependent – prices influence willingness to pay. If the trades we make are arbitrarily influenced by anchors then we may not make choices that reflect the real utility or pleasure we derive from products and the market may not set optimal prices
  48. 48. NYC taxi drivers Camerer, Babcock, Loewenstein, & Thaler (2000) Strategy: Set daily income target. Stop working when target is reached. phenomenon: Drivers quit earlier on busy days… So drivers work least when wage rates are highest. Would earn 8% more if they worked same # hours every day. (+ People would find it easier to get cabs on rainy days)
  49. 49. Choice blindness (Johansson, Hall, Sikström & Olsson, 2005) “Sleight of hand”: Most participants fail to detect that their “choice” is not what they chose. When asked to motivate their choices, the participants delivered their verbal reports with the same confidence, and with the same level of detail and emotionality for the faces that were not chosen, as for the ones that were actually chosen. A follow-up experiment involved shoppers in a supermarket tasting two different kinds of jam, then verbally explaining their choice while taking further spoonfuls from the "chosen" pot. The pots were rigged so that when explaining their choice, the subjects were tasting the jam they had previously rejected. Similar experiments done with tea .
  50. 50. 56 The Ostrich effect Karlsson, Loewenstein and Seppi (2009) found that, following market downswings, investors are less likely to login to monitor their retirement portfolios. They concluded that, rather like (apocryphal) ostriches sticking their heads in the sand, investors avoid unpleasant information by reducing portfolio monitoring in response to news of negative market movement.
  51. 51. 57 The Meerkat effect Gherzi, Egan, Stewart, Haisley & Ayton (2014) find that investors increase their portfolio monitoring following both positive and daily negative market returns, behaving more like hyper-vigilant meerkats than head-in-the-sand ostriches. Moreover, an investor personality trait – neuroticism - attenuates the pattern of portfolio monitoring suggesting that market–driven variation in portfolio monitoring is attributable to psychological factors. Least neurotic Most neurotic  
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