In this presentation, you will be introduced to one of the masterpieces of Daniel Kahneman and Amos Tversky, in which they have explained human's bounded rationality in decision making and judgments. This work presents the two-system view of cognition which consists of intuition and reasoning and describes their differences in terms of their process and content in our judgments.
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Maps of Bounded Rationality: Psychology for Behavioral Economics
1. Maps of Bounded Rationality
Psychology for Behavioral Economics
By: Erfan MORADIAN
December 2017
2. Daniel Kahneman
Born on March 5, 1934
Israeli-American psychologist
Nobel Memorial Prize in
Economics, 2002
Seventh most influential
economist in the world
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3. Daniel Kahneman
Best selling book, 2011
Senior scholar and faculty member
emeritus at Princeton University
Known for
Cognitive Biases
Behavioral Economics
Prospect Theory
Loss Aversion
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5. Introduction
Exploration of the psychology of intuitive beliefs and choices
Examination of their bounded rationality
A perspective on three major topics
I. Heuristics of judgment
II. Risky choice
III.Framing effects
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11. The two-system view
Intuition or System 1
Fast
Parallel
Automatic
Effortless
Associative
Slow-learning
Operational
Characteristics
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12. The two-system view
Reasoning or System 2
Slow
Serial
Controlled
Effortful
Rule-governed
Flexible
Operational
Characteristics
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13. The two-system view
Perception
Intuition
System 1
Reasoning
System 2
Slow
Serial
Controlled
Effortful
Rule-governed
Flexible
Fast
Parallel
Automatic
Effortless
Associative
Slow-learning
Percepts
Current stimulation
Stimulus-bound
Conceptual representations
Past, Present and Future
Can be evoked by language
ProcessContent
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14. The two-system view
The perceptual system and the intuitive operations of
System 1 generate impressions of the attributes of
objects of perception and thought.
These impressions are not voluntary and need not be
verbally explicit.
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15. The two-system view
Judgments are always explicit and intentional.
System 2 is involved in all judgments.
The label ‘intuitive’ is applied to judgments that directly
reflect impressions.
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16. Cognitive Self-monitoring
A bat and a ball cost $1.10 in total. The bat
costs $1 more than the ball.
How much does the ball cost?
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17. The surprisingly high rate of errors in this easy problem
illustrates how lightly the output of System 1 is
monitored by System 2.
People are not accustomed to thinking hard.
They are often content to trust a plausible judgment
that quickly comes to mind.
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18. The accessibility dimension
The core concept of intuitive judgments and
preferences
The ease with which particular mental contents come to
mind
e.g category labels, descriptive dimensions (attributes,
traits), values of dimensions, etc.
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21. The accessibility dimension
Accessibility is a continuum, not a dichotomy, and some
effortful operations demand more effort than others.
The acquisition of skill selectively increases the
accessibility of useful responses and of productive ways
to organize information.
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22. Determinants of accessibility
Genetic differences
Expectations
Context
Properties and presentation of the object
Familiarity with the perceived object (associative activation)
Emotional significance, e.g. Investments based on the degree
of likeness, insurance based on fear concerns.
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26. Determinants of accessibility
Natural assessments
Attributes which are routinely and automatically
registered by the perceptual system or by System 1,
without intention or effort.
Attributes that come to mind without intention or
effort.
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27. Determinants of accessibility
Natural assessments
Physical properties such as size, distance and loudness
Similarity
Affective valence
Causal propensity
Surprisingness
Mood
Accessibility
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28. Framing Effects
Imagine that the United States is preparing for the
outbreak of an unusual Asian disease, which is expected to
kill 600 people. Two alternative programs:
If Program A is adopted, 200 people will be saved
If Program B is adopted, there is a one-third probability
that 600 people will be saved and a two-thirds
probability that no people will be saved
Which of the two programs would you favor?
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29. Framing Effects
A different description of the options:
If Program A’ is adopted, 400 people will die
If Program B’ is adopted, there is a one-third probability
that nobody will die and a two-thirds probability that
600 people will die
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30. Framing Effects
Extensionality (Invariance): The assumption that
preferences are not affected by inconsequential variations in
the description of outcomes.
Framing Effect: Where extensionally equivalent descriptions
lead to different choices by altering the relative salience of
different aspects of the problem.
Very important when considering policy
Basic principal of framing is the passive acceptance of the
formulation given
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31. Prospect Theory
A general property of perceptual systems is that they are
designed to enhance the accessibility of changes and
differences.
Perception is reference-dependent:
The perceived attributes of a focal stimulus reflect the
contrast between that stimulus and a context of prior and
concurrent stimuli.
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33. Prospect Theory
Would you accept this gamble?
50% chance to win $150
50% chance to lose $100
Would your choice change if your overall wealth were lower by
$100?
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34. Prospect Theory
Which would you choose?
lose $100 with certainty
or
50% chance to win $50
50% chance to lose $200
Would your choice change if your overall wealth were higher by $100?
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35. Prospect Theory
An alternative theory of risk
The carriers of utility are gains and losses
Changes of wealth rather than states of wealth.
Preferences are reference-dependent, and includes the
extra parameter that is required by this assumption.
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36. Bernoulli’s error
The assumption that the carriers of utility are final
states
The error of reference-independence is built into the
standard representation of indifference maps.
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38. Value Function for Changes
Preferences are determined by attitudes to gains and
losses, defined relative to a reference point.
The value of the function is kinked at the reference
point.
Convex in the domain of gains, favoring risk aversion
Concave in the domain of losses, favoring risk seeking
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39. Prospect Theory
Two persons get their monthly report from a broker:
A is told that her wealth went from 4M to 3M
B is told that her wealth went from 1M to 1.1M
“Who of the two individuals has more reason to be
satisfied with her financial situation?”
“Who is happier today?”
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40. Prospect Theory
In Bernoulli’s analysis only
the first of the two questions is relevant.
long-term consequences matter.
Prospect theory, in contrast, is concerned with short-
term outcomes.
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41. Attribute Substitution: A
Model of Judgment Heuristics
People rely on a limited number of heuristic
principles which reduce the complex tasks
of assessing probabilities and predicting
values to simpler judgmental operations.
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42. Attribute Substitution
A formulation in which the reduction of
complex tasks to simpler operations is
achieved by an operation of attribute
substitution
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43. Attribute Substitution
Judgment is said to be mediated by a heuristic
when the individual assesses a specified target
attribute of a judgment object by substituting
another property of that object which comes
more readily to mind
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45. Attribute Substitution
1- “How happy are you with your life in
general?”
2- “How many dates did you have last
month?”
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Correlation = 0.12
46. Attribute Substitution
1- “How many dates did you have last
month?”
2- “How happy are you with your life in
general?”
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Correlation = 0.66
47. Attribute Substitution
Affect (liking or disliking) is the heuristic
attribute for numerous target attributes,
including the evaluation of the costs and
benefits of various technologies
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48. Attribute Substitution
A technology that is liked is judged to have
low costs and large benefits. These judgments
are surely biased, because the correlation
between costs and benefits is generally
positive in the world of real choices
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49. Attribute Substitution
Different responses to public goods (e.g.,
willingness to pay, ratings of moral
satisfaction for contributing) yielded
essentially interchangeable rankings of a set
of policy issues
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52. Prototype Heuristics
Prototype heuristics share a common
psychological mechanism - the
representation of categories by their
prototypes - a remarkably consistent
pattern of biases
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53. Prototype Heuristics
Whenever we look at or think about a set
(ensemble, category) which is sufficiently
homogeneous to have a prototype,
information about the prototype is
automatically accessible
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54. Prototype Heuristics
Whenever we look at or think about a set
(ensemble, category) which is sufficiently
homogeneous to have a prototype,
information about the prototype is
automatically accessible
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56. Prototype Heuristics
The low accessibility of sums and the
high accessibility of prototypes have
significant consequences in tasks that
involve judgments of sets
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57. Prototype Heuristics
i) Category prediction
ii) Pricing a quantity of public or private goods
iii) Global evaluation of a past experience that
extended over time
iv) Assessment of the support that a sample of
observations provides for a hypothesis
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59. Prototype Heuristics
Two major biases, which generalize the
biases of representativeness:
Violations of monotonicity
Extension neglect
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60. Violations of monotonicity
Adding elements to a set may lower the
average and cause the judgment of the
target variable to decrease, contrary to
the logic of extensional variables
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61. Extension neglect
Other things equal, an increase in the
extension of a category will increase the
value of its extensional attributes, but
leave unchanged the values of its
prototype attributes
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62. The Boundaries of Intuitive
Thinking
The judgments that people express, the
actions they take, and the mistakes they
commit depend on the monitoring and
corrective functions of System 2, as well
as on the impressions and tendencies
generated by System 1
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63. Intuitive Judgement
is impaired by:
Time pressure
Concurrent involvement in a different cognitive
task
Performing the task in the evening for "morning
people" and in the morning for "evening people"
Being in a good mood
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64. The facility of System 2
is positively correlated with:
Intelligence
Need for cognition
Exposure to statistical thinking
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