Irrationally Influenced Rational Decisions - Deepstash
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Irrationally Influenced Rational Decisions

How do we make decisions when the outcomes are uncertain?

One possible way would be to calculate the expected value of each option by multiplying each possible outcome amount by its probability and then choosing the option with the highest expected value.

While this strategy would maximize the payoff in expectation, this is not what we tend to do. In particular, we seem to be irrationally influenced by past outcomes of our decisions when making subsequent choices.

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MORE IDEAS ON THIS

How A Lucky Win Skews A Known Probability

Specifically, the researchers asked 70 people to repeatedly choose between two lotteries in which they could gain some reward with some probability. The lotteries varied in the size of the reward, the probability of receiving it, and the amount of risk involved.

The results showed that

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199 reads

Neuroeconomics

Research in the multidisciplinary field of neuroeconomics has mainly been driven by two influential theories regarding human economic choice:

  • prospect theory, which describes decision-making under risk, and
  • reinforcement le...

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Probabilities & Prospects: Winning Is Believing

Professor Yamada also says: “Such learning from unexpected events underlies reinforcement learning theory and is a well-known algorithm that occurs when people need to learn the rewards from experience.

It is interesting that it occurs even if learning ...

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200 reads

How Winning Changes Perception Of The Variables

Senior author of the study Assistant Professor Hiroshi Yamada says “This behavior is surprising because winning probabilities were clearly described to the participants (participants did not have to learn them from experience) and these probabilities were also completely inde...

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188 reads

Dymanic Prospect Theory

Researchers from the University of Tsukuba, Japan have developed and validated a model (“dynamic prospect theory”) that integrates the most popular model in behavioral economics to describe decision-making under uncertainty—prospect theory, and a well-established model of learnin...

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222 reads

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xarikleia

“An idea is something that won’t work unless you do.” - Thomas A. Edison

Do we know the odds or do we like the odds?

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Using Decision Trees

  • Understand the different outcomes that could happen (both positive and negative)
  • Calculate the expected return or loss of each outcome
  • Attach a probability to each outcome
  • Understanding the magnitude of the return or loss
  • Multiply the probability by the magnit...

Expected value

We all spend time making decisions with some risk involved. We look at each situation and consider the likelihood that something will happen as well as if it would be worth it.
For example, whether to sprint across the street when the sign says “don’t walk.”

Expected value...

Good decisions

Good decisions

To make good decisions, we generally need to do the following:

  • Identify the decision: recognizing the need to make a decision, and identifying what that decision involves.
  • Set our goals: establishing what we want to achieve with the decision...

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