How many clues do you need?
What did we have so far? We heard that when we have to make decisions, we either examine the most important cue that is available to us or we examine all available cues for the current situation. In case the decision maker examines all cues, he or she assigns certain values or weights to these cues and makes a decision. So far I wrote that the simpler matching heuristic is a better predictor of decision making, although, it only searches through a small subset of cues.
If you were offered £500 with a probability of .50 (500, .50) otherwise nothing or £2500 with a probability of .10 otherwise nothing (2500, .10), which gamble would you choose?
In a study with Austrian students 88% would choose the first gamble with the smaller probability of the minimum gain but the lower maximum gain (Branstätter et. al., 2006). The researchers developed the priority rule in which we consider reasons in the following order: minimum gain, probability of minimum gain, maximum gain.
However, when should one stop considering these rules, or should you always examine each of the criteria? To answer this question read the following gamble (it’s the last one, I promise!).
You were offered either £200 with a probability of .50 (200, .50) otherwise nothing or £100 for sure. If you would be offered £2000 with a probability of .50 (2000, .50) otherwise nothing or £100 for sure, you might select a gamble with a different outcome. The minimum gains differ by the same amount and the probabilities are the same. The maximum outcomes, however, are different (1. £100, 2. £1000). Therefore a stopping rule has been proposed: Decision makers stop examination when the minimum gains differ by 1/10 (or more) of the maximum probabilities.
These two rules together and the decision rule, which tell you to choose the gamble with the more attractive gain, define the priority heuristic. The priority heuristic is able to explain shortcomings in decision making, e.g. the Allais Paradox or the Certainty Effect.
OK, good description. Any thoughts about whether this is a more plausible account of risky decision making than prospect theory?
ReplyDeleteTo my mind Prospect Theory is the better predictor of decision making compared to Priority Heuristic. For the reason that prospect theory assess the decision maker's reference point. Priority heuristic does not account for such things as well as for framing effects. I also think that priority heuristic would struggle with gambles that involve losses. However, it's just a thought and I can't think of an example.
ReplyDeleteYes, I think there are some things that the priority heuristic doesn't account for, such as the last-race-of-the-day effect....this is another effect which prospect theory would say is related to the reference point.
ReplyDelete