Complex Decision Making

Judgement and Decision-Making in the Real World

Reading: Ayton (2005) Judgement and decision making

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Recommended: Busemeyer and Wang (2015), Bruza, Wang, and

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Busemeyer (2015)
 Features of Real-World Decision-Making
•Complex, multi-attribute alternatives
•Decisions often made under risk:
– Multiple outcomes can follow from decision, can’t be foreseen
with certainty
– Option A: Go to pub tonight, work on lab report tomorrow night
– Option B: Don’t go to pub, work on report tonight and tomorrow
•Possible outcomes:
– Have good time tonight, submit report on time
– Have good time tonight, incur late penalty on report
– Have boring time writing tonight but be sure to submit on time
 Subjective Expected Utility Theory

•Von Neumann and Morgenstern (1944), Savage (1954)

•Normative theory: how decisions should be made by a rational decision
maker
•Calculate the value (utility) of each alternative to you, then pick
alternative with highest expected utility
•Assumes you know or can estimate probabilities of various outcomes,
otherwise decision under uncertainty
– “risk” means probabilities are known, “uncertainty” means unknown
Subjective Expected Utility

• Assign utilities to each outcome

• Calculate expected utilities for each
choice
Subjective Utility or “Moral Value” (Bernoulli, 1738)

•Subjective utility and risk aversion

•Gamble 1:
– Win $50 with certainty
•Gamble 2
– Win $102 with probability 0.5, $0 with probability 0.5
•EU(Gamble 2) = $51 > EU(Gamble 1) = $50
•Phenomenon of risk aversion
Why Risk Aversion? (Bernoulli, 1738)

•Subjective utility function is

concave
•Equal objective changes in
value produce diminishing
changes in utility
•U($100) < 2U($50)
 Axiomatic Basis of Expected Utility Theory
•Preferences must satisfy certain axioms for decisions to be optimal:
•Completeness (comparability)
– Either A > B (A is preferred to B) or A < B or A ~ B (indifference)
•Transitivity
– If A > B and B > C then A > C
•Dominance
– Option A dominates Option B if it is better in one respect, and at least
as good or better in all other respects. Then A > B
•Independence
– If there is an outcome that is unaffected by, or independent of, the
choice, then the choice should not be affected by this outcome
•Invariance
– Different ways of representing the same choice problem should
result in the same choice
 Violations of Transitivity

Applicant Intelligence Emotional Social

Stability Facility
A 69 84 75

B 72 78 65

C 75 72 55
D 78 66 45
E 81 60 35

• Ratings of university applicants (Tversky, 1969)

• Pairwise comparison task, told to rate intelligence most highly
• On average, A > B, B > C, C > D, D > E but E > A
 Violations of Independence
The Allais Paradox (Allais, 1953)

Ticket
Number
Situation 1 1 2-11 12-100
Choice A $1,000,000 $1,000,000 $1,000,000
Choice B $0 $5,000,000 $1,000,000

•Two 100 ticket lotteries, your choice determines which you play
•For most people A > B although B has the higher utility
•People reluctant to exchange certain benefit for a larger but slightly
uncertain benefit (Risk aversion)
 Violations of Independence
The Allais Paradox (Allais, 1953)

Ticket
Number
Situation 2 1 2-11 12-100
Choice A $1,000,000 $1,000,000 $0
Choice B $0 $5,000,000 $0

•Now 89-90% of winning nothing

•For most people now B > A
 The Allais Paradox
Ticket
Number
1 2-11 12-100
Situation 1 Choice A $1,000,000 $1,000,000 $1,000,000
Choice B $0 $5,000,000 $1,000,000
Situation 2 Choice A $1,000,000 $1,000,000 $0
Choice B $0 $5,000,000 $0

•Tickets 12-100 have the same outcome for Choice A and Choice B in
both situations
•Independence says if outcome is unaffected by choice, value of this
outcome shouldn’t influence choice
•Value of constant outcome causes preferences to change
 The Allais Paradox

Ticket
Number
1 2-11
Situation 1 Choice A $1,000,000 $1,000,000
Choice B $0 $5,000,000
Situation 2 Choice A $1,000,000 $1,000,000
Choice B $0 $5,000,000

•Note that two situations are identical except for the value of the
choice-independent outcome!
 Framing Effects (Violations of Invariance)
Tversky & Kahneman (1981)
•Epidemic will kill 600 people
•Group 1
– Program A: 200 people will be saved with certainty
– Program B: 1/3 chance all 600 will be saved; 2/3 chance no one will
be saved
•Which do you choose?
 Framing Effects (Violations of Invariance)
Tversky & Kahneman (1981)
•Epidemic will kill 600 people
•Group 1
– Program A: 200 people will be saved with certainty
– Program B: 1/3 chance all 600 will be saved; 2/3 chance no one will
be saved
•72% chose Program A, 28% chose Program B
•Risk aversion
 Framing Effects (Violations of Invariance)
Tversky & Kahneman (1981)
•Epidemic will kill 600 people
•Group 2
– Program C: 400 people will die with certainty
– Program D: 1/3 chance no one will die; 2/3 chance all 600 will die
•Which do you choose?
 Framing Effects (Violations of Invariance)
Tversky & Kahneman (1981)
•Epidemic will kill 600 people
•Group 2
– Program C: 400 people will die with certainty
– Program D: 1/3 chance no one will die; 2/3 chance all 600 will die
•22% chose Program C; 78% chose Program D (risk seeking)
•Preference reversal
•Positive (gain) frame leads to risk aversion, negative (loss) frame leads
to risk seeking
 The Fourfold Pattern of Risk Attitudes

Gains Losses
Low Probability C($100, .05) = $14 C(-$100, .05) = -$8
Risk seeking Risk aversion

High Probability C($100, .95) = $78 C(-$100, .95) = -$84

Risk aversion Risk seeking

•C(x, p) is the certainty equivalent to prospect (x, p) (win/lose $x with

probability p)
•Framing (gain/loss) changes pattern of risk preferences
•People very sensitive to small deviations in probability from certainty
 Prospect Theory (Kahneman & Tversky, 1979)

•Asymmetrical value function: concave for gains, convex for losses

•Nonlinear probability weighting function, w(p): overweights small
probabilities
Value Function

•Reference point at v(0) = 0

•Cost function is steeper than gain
function (> 2:1)
•Subjective costs grow more
rapidly than subjective gains
•Game: Pay $50 to play, get
money back and win $??? with
probability 0.5, otherwise win
nothing
•Most people want expected value
of win of at least $100
Gain Frame

•Concave value function means

(1/3)V(600) < V(200)
•Risk averse (pick 200 saved
with certainty)
Loss Frame

•Convex cost function means

that (2/3) C(600) < C(400)
•Risk seeking (pick 600 die
with probability 2/3)
•Negatively accelerating value
function explains shift from
risk-seeking to risk-averse
behaviour
•Large gains and losses are
both underestimated (pick the
larger gain and the smaller
loss)
The Weighting Function

•If values (and costs) weighted by

probabilities, always risk averse for
gains, risk seeking for losses
•Flips over at small probabilities
(fourfold pattern)
•Nonlinear weighting of
probabilities overcomes effects of
value function
•Buy lottery tickets (big payoff
with small probability)
•Buy insurance (pay to avoid large
cost with small probability)
 Heuristics and Biases

•Computations required by normative theory are complex and required

information may not be readily available
•Brain uses simpler heuristics (rules of thumb) which are quick, but
make us prone to biases
•Representativeness Heuristic
•Bill is 34 years old. He is intelligent but unimaginative, compulsive and
generally lifeless. In school, he was strong in mathematics and generally
weak in humanities
1. Bill is an accountant
2. Bill plays jazz for a hobby
3. Bill is an architect
 Heuristics and Biases

•Base Rate Neglect Bias

There are 70 Christians and 30 Satanists at a pan-faith meeting. John is a
man who wears goth clothing, has long black hair, multiple piercings,
listens to death metal, and has had a religious experience while under the
influence of LSD.

John is a Christian?
John is a Satanist?
 Heuristics and Biases

•The Availability Heuristic

– Are there more letters in English beginning with a “K” or with “K” as
the third letter?
– Are people more likely to die by being murdered or by suicide?
•Frequency judgments based on ease of recall
 Heuristics and Biases

•The Conjunction Fallacy

•Linda is 31-years old, single, outspoken and very bright. She majored in
philosophy. As a student she was deeply concerned with issues of
discrimination and social justice, and recently participated in
demonstrations against logging and wood chipping.
1. Linda is a bank teller
2. Linda is active in the feminist movement
3. Linda is a bank teller who is active in the feminist movement
 Heuristics and Biases

•Use of representative heuristic leads to inferences that violate laws

of probability
 Quantum Probability
•Decision paradoxes often arise because people don't reason according to
the (classical) laws of probability.
•“Sure thing principle”: If you prefer A to B under state of the world X
and prefer A to B under state of the world ~X, then you should prefer A to
B if you don't know the state of world (X or ~X)
•(Classical) Law of Total Probability
P(A >B) = P(A > B & X) + P(A > B & ~X)
•Linda example

P(A) = P(A & B) + P(A & ~ B)

implies P(A) >= P(A & B)
•People's judgments often violate these principles
 Quantum Probability and Quantum Cognition
•Quantum probability explains behaviour of elementary particles, doesn't
obey rules of classical probability – making a measurement (observation)
changes the state of the world.
•Making measurement of A then B won't give same answer as making
measurement of B then A
•Described by rules of quantum probability, can predict violations of the
Law of Total Probability and the conjunction “fallacy.”
•People's judgments of probability seem to follow these same rule
•See articles by Busemeyer & Wang (2015), Bruza, Wang, & Busemeyer
(2015) on LMS
 Conclusions
•Decision-making is hallmark of psychological functioning
•Good theories of cognitive processes involved in simple and complex
decision-making
•Increasing understanding of links between cognitive processes and
neural substrate and affectivity
•Potential for theoretical unification: bridging the brain-behaviour link,
understanding relationship between cognition and motivation