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Behavioral Decision Making 90L565 03 – 6 ECTS Credits First spring semester 2014 Instructor: Outi Somervuori, Jyrki Wallenius Mondays 13-16, Tuesdays 13-16. Outline. Overview of the course Introduction Contents Evaluation and Grading Objectives Introduction to the analysis of decisions

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Outline

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  1. Behavioral Decision Making90L565 03 – 6 ECTS CreditsFirst spring semester 2014Instructor: Outi Somervuori, Jyrki WalleniusMondays 13-16, Tuesdays 13-16

  2. Outline • Overview of the course • Introduction • Contents • Evaluation and Grading • Objectives • Introduction to the analysis of decisions • Behavioral decision making research • Reference: Baird, B. F.: Managerial Decisions Under Uncertainty: An Introduction to the Analysis of Decision Making, Wiley, 1989 (textbook) – or other introductory texts

  3. Objectives, overview of the course The purpose of this course is, within risky and riskless choice to: • provide an overview of behavioral decision research • understand the anomalies within classical decision theories • utilize the basic (descriptive) decision models in practice • differentiate between descriptive and normative theories of decision making • provide an idea how to improve decision making • relate the theories to the domains of financial decision making and consumer decision making

  4. Objectives, overview of the course --- much of the course is a criticism and extension of the classical expected utility model Readings: many classic papers (Herbert Simon, Amos Tversky, Daniel Kahneman, James March, Howard Raiffa, Antonio Damasio, Antoine Bechara) Can you conduct behavioral decision research after the course? … Can lead to it …

  5. Contents of the course • Introduction to the analysis of decisions (Expected Monetary Value, Expected Utility) • The subjective components of decision making • Utility • Subjective probabilities • Limited rationality (Herbert Simon) • Axioms, limitations and anomalies in EU model • Probabilistic reasoning: heuristics and biases • Theory of choice: Tversky-Kahnemanprospect theory, evidence from the field

  6. Contents of the course … continued • Role of Framing and Context • The role of emotions in decision making • Psychophysiological and neurological methods in decision-making • Motivational factors in decision theories • Atkinson’s motivational determinants of risk-taking • Regret theory • Improving decisions • Even Swaps • Organizational decisions

  7. Grading policy – multiple components • Final exam 40% (First exam 11.2.2014, second 4.4.2014) • 2 sets of homework problems (total 20%) – note due dates • Essay questions (total 20%) – largely not covered in class – note due date • Class presentation 10% (email me your pp slides) • Mandatory readings, class participation 10 % Note: Need to have a passing grade from each component Course: Combination of lectures, student presentations, class discussions, “small-scale” experiments, readings, essays, homeworks Readings: Where to get copies? Articles? Book chapters? When to read?

  8. Grading policy … continued • Essay questions • Generally topics not covered in class, broaden your perspective on behavioral decision research • 2 essays, 2 paperseach • Student presentations: show slides • Agree on who presents what when • Agree on the format, length etc (30-45 min including discussions, 10-25 pp slides) • Homework problems: 2 sets • hand out, will be posted on website, note due dates

  9. INTRODUCTION TO THE ANALYSIS OF DECISIONS

  10. Introduction to the analysis of decisions: descriptive vs normative • Positive (descriptive) versus normative (prescriptive): fundamental difference • Descriptive: How are decisions made? • Prescriptive: How should decisions be made? What decisions should we make? • 80% descriptive, 20% normative in the course • Sometimes same decision model is used for both purposes • Descriptive = behavioral decision theory … but also interested in improving decisions • Prescriptive = decision analysis, management science (“the science for better”)

  11. Introduction to the analysis of decisions … examples • Examples of decision problems (personal, corporate) • Choice of consumer durables • Company recruiting decision • Buying a home • Choice of a location for a commercial airport • Whom to vote in presidential elections • Pricing alcoholic beverages • Deciding about the rate at which random sampling of the production line is to take place • Uncertainty, multiple conflicting objectives (attributes, dimensions) – either or both; small versus large number of alternatives

  12. Introduction to analysis of decisions: combining objective and subjective • Decision making has two important subjective elements: • Quantification of uncertainty (probabilities) • Quantification of preferences using utilities/values • You can choose to ignore probabilities and utilities/values – and just make choices … but they are embedded in your choices, in other words your choices reflect your utilities/values and your perception of the likelihood what will happen • Decision theorists have developed theories of choice (normative and descriptive) that are often based on these concepts

  13. Introduction to the analysis of decisions … framework Theorists conveniently distinguish 4 steps in decision making: • Structuring the problem • Generating alternative courses of action • Specification of possible consequences for each alternative • Indicating the chronology of the problem (what happens when), including options for collecting information • Describing likelihoods of the possible consequences of each alternative (often subjective) • Assigning utilities (values) to the possible consequences (subjective) • Synthesizing the information to explain why a particular alternative is chosen or should be chosen (theory of choice)

  14. What else influences decision making?

  15. Source: Johnson & Goldstein, 2003, Science.

  16. Madonnan CD (Hsee & Rottenstreich, 2004) • How much would you be willing to pay for Madonna’s CD (5 CD or 10 CD)? • Group 1: valuation by calculation • 5 CD, average 15,10 USD • 10 CD, average 28,81 USD • Group 2: valuation by emotion • 5 CD, average 22,64 • 10 CD, average 19,77

  17. Information processing A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost? • Intuitive answer: 10 cents • Correct answer: 5 cents

  18. Informationprocessing • 2 + 2 = • 18 x 27 = http://www.youtube.com/watch?v=vJG698U2Mvo

  19. Canthereeverbetoomanyoptions? (Iyengar & Lepper, 2000) • Two conditions: small assortment 6 jams x large assortment 24 jams • Every consumer who approached the table received a coupon to get $1 off the purchase of any jam of that brand. • Results • more consumers approached the tasting table when it displayed 24 jams • 30% of all consumers who saw the small assortment of six jams at the tasting display actually bought one of the jams (with the coupon), whereas in the large assortment case, only 3% of the people redeemed the coupon for a jam • Too many options decreased the motivation to make a choice

  20. What else influences decision making? • E.g. • Framing • Emotions • Intuition • Information overload • Often people make systematic and predictable errors in decision-making. • These features may help or hurt decision making.

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