Psychology 2135A/B Lecture Notes - Lecture 20: Expected Utility Hypothesis, Prospect Theory, Risk Aversion

• School: Western University
• Department: Psychology
• Course: Psychology 2135A/B
• Professor: John Paul Minda

Document Summary

What is decision making: reducing uncertainty, maximizing outcome. Conflict: decision maker must make tradeoffs across different dimensions (eg. car"s power vs. gas mileage; tv"s price &quality; spending time at work vs. with family, outcome of decision often depends on uncertain variables or events (eg. future. Uncertainty demand for a product, completion time) Evaluation: select the best, probabilities, risks/benefits. Rational model: expected value, expected utility. Sets the norm for all possible decisions made. People set a value for all the alternatives &choose the most valuable one. This is done by calculating an expected value for each alternative. Example: winning w/probability 0. 2, or else winning nothing. Ev=( x . 20)-(sh x . 80)=. 00: winning w/probability 0. 25, or else winning nothing. Ev=( x . 25)-(sh x . 75)=. 75: winning w/probability 0. 2 but each play costs . Ev=( x . 20)-( x . 80)=. 00: winning w/probability . 25 but each play costs .