MARK 5342 Advanced Topics

1. Day 3 Decision-Making Strategies MARK 5342 Advanced Topics

2. Compensatory Strategies

3. Rules of Compensatory Strategies • Used for multi-attribute choices where the choices are comprised of multiple dimensions • People trade off low values on one dimension for high values on another dimension • Different types of compensatory strategies • Linear model • Additive Difference model • Ideal point model

4. Linear Model • Each dimension is weighted according to its importance • The weighted values are summed to form an overall index of value • This is one of the foundations of choice modeling • Based on expected utility theory

5. Additive Differences Model • Each choice alternative is evaluated on all dimensions • The first step is looking at all alternatives for a single dimension • The differences are weighted and summed • It simplifies the choice (eliminates unnecessary information) • Tends to seem closer to how people make decisions • Based on satisficing theory

6. Ideal Point Model • Comparison of each alternative to an “ideal” • Evaluate each one as to how close or far it is from the “ideal”

7. Summary of Compensatory Strategies • Best suited for fairly simple decisions with few dimensions • Well suited when the dimensions are known or knowable, and when an “ideal” choice can be envisioned

8. Non-Compensatory Strategies

9. Rules of Non-Compensatory Strategies • Do not allow trade-offs • Four major types • Conjunctive rule • Disjunctive rule • Lexicographic strategy • Elimination by aspects strategy

10. Conjunctive Rule • Eliminate any alternatives that fall outside certain pre-defined boundaries • Example of satisficing rather than optimizing

11. Disjunctive Rule • Each alternative is evaluated in terms of its best attribute, regardless of the rating on other dimensions

12. Lexicographic Strategy • Identify the most important dimension and choose the most desirable alternatives for that dimension • If there is more than one “winner,” go to the next most important dimension and evaluate the remaining alternatives in the same way

13. Elimination-by-Aspects Strategy • Probabilistic variation of the lexicographic strategy • Each dimension selected with a probability proportional to its importance • Then alternatives are compared on that highest probability dimension and winners move to the next dimension

14. Choosing Between Equal Alternatives • People pick the most important dimension of the alternatives and then select the highest rated alternative on that dimension • Pragmatic approach

15. Decision-Making Facilitators and Barriers

16. Rationality • Logical thinking • Prefrontal cortex • Metacognition – ability to reflect on one’s own mind and thus regulate (to a degree) the emotions • Monitors emotions and decides what to take seriously and what to ignore

17. Overthinking a Problem • Claude Steele • Stanford sophomores took the Graduate Record Exam (GRE) • White students performed significantly better than black students • Called the Achievement gap • When students told it was just a preparatory drill, no difference in scores

18. Placebo Effect • Power of prefrontal cortex to modulate most body signals, like pain • Fake pain-relieving cream provided relief • Electric shocks mitigated • Sobe Adrenaline Rush – lower price seen as producing less effective in problem solving

19. Fooling the Senses • CalTech and Stanford wine tasting experiment • Three levels of wine - $5, $45, $90 • With blind testing, respondents could sort them out fairly accurately • When asked to take a short survey about the wine characteristics, they became confused and selected incorrectly

20. Mental Accounting • Brian Wansink, Cornell • Bottomless bowl of soup • Whatever people see on their plate, they eat • They keep track by counting plates, or scoops of M&M’s, not actual food

21. Anchoring Effect • Daniel Kahneman • Random number generated by roulette wheel and shown to respondents • Estimate the number of African countries in the United Nations • Those who saw higher roulette number guessed higher number of African countries, and those who saw lower roulette number guessed lower number of African countries

22. Overconfidence • Plous, Ch. 19 • Overconfidence is greatest when accuracy is near chance levels • Overconfidence diminishes as accuracy increases from 50 to 80 percent, and when it exceeds 80 percent, people become underconfident • Discrepancies between accuracy and confidence are not related to intelligence

23. Calibration • The degree to which confidence matches accuracy

24. Self-test of Overconfidence

25. Self-test of Overconfidence

26. Bias for certainty • Confidence in decisions is comforting • That can lead to disastrously wrong decisions • Counter that by paying attention to the details that don’t fit the overall pattern • George Day’s “small voices”

27. Reducing Overconfidence • Stop to consider reasons why your judgment might be wrong • We all have blind spots – reducing overconfidence is a matter of recognizing that those blind spots may exist and trying to examine alternatives

28. Behavioral Traps • Plous, Ch. 21 • Embarking on a promising course of action that subsequently becomes untenable • Taxonomy of traps • Time delay traps • Ignorance traps • Investment traps • Deterioration traps • Collective traps

29. Time Delay Traps • Momentary gratification versus long term consequences – smoking or extra dessert • Or avoidance of momentary discomfort versus long term consequences – skipping a dentist appointment • Marketing implication – buy now, pay later plans

30. Marshmallow test of Self Control • Walter Mischel, 1970’s • Four year olds • Eat one marshmallow or wait a few minutes to get two marshmallows • Most kids couldn’t resist for long • Kids who can’t resist tend to exhibit behavioral problems later in life • Tends to stabilize after the teen years

31. Ignorance Traps • Negative consequences not understood by the decision-maker • Common when new life paths are taken and consequences are not forseeable • Example – college students getting MSMR degrees

32. Investment Traps • When prior expenditures lead people to make bad choices • People sometimes ignore the “sunk cost” of investments

33. Deterioration Traps • Costs and benefits change over time, leading to less desirable outcomes

34. Collective Traps • Apply to groups of people • Sub-optimization by an individual leads to adverse consequences for the group

35. Prisoner’s Dilemma Prisoner A Confesses Doesn’t confess 5 years 10 years Confesses 5 years 0 years Prisoner B 0 years 1 years Doesn’t confess 10 years 1 years Above diagonal - Prisoner’s A sentence; below diagonal – Prisoner B’s sentence

36. Prisoner’s Dilemma • Dilemma is that if both don’t confess, they get a much shorter (1 year) sentence, but are also exposed to a much longer (10 year) possibility • Both are better off confessing and taking a 5 year sentence • What would you do?

37. Dollar Auction Game • A dollar is auctioned to two bidders • Four rules: • No communication is allowed among bidders while the auction is taking place • Bids can be made only in multiples of 5 cents, beginning with a nickel • Bids must not exceed $50 • The two highest bidders both have to pay what they bid, even though the dollar goes only to the highest bidder

38. Dollar Auction Game Outcomes • When the two highest bids total $1.00, the auctioneer is assured of a profit • Still attractive from the bidder’s perspective • Second inflection point is when the first bidder reaches $1 • Second bidder can’t quit, as they stand to lose 95 cents if they don’t go to $1.05 • Bidding often reaches a few dollars

39. Ways to Avoid Entrapment • Explicitly consider withdrawal costs before beginning • Use different decision-makers for the initial and subsequent decisions – less personal involvement

40. Community and Society

41. Morality and the Cortex • Moral decisions tend to be regulated by emotions • Reason is invented as logical support for the emotional decision • Moral decisions require taking other people into account, not just oneself

42. Experiment in Morality • Scenario 1: You are the driver of a runaway trolley. The brakes have failed. If you do nothing, five maintenance workers will die. If you swerve, one maintenance worker will die. • Scenario 2: You are standing on a footbridge over a trolley track. Unless the trolley can be stopped, five maintenance workers will die. Standing next to you is a large man, who if you push over the bridge, will fall on the track and stop the trolley, but the large man will die.

43. Results • In scenario 1, when you are the driver, 95% of respondents agree it is better to swerve and save five men with one other man dying. This is a personal moral situation. • In scenario 2, almost nobody is willing to push the man over the edge, resulting in five people dying. This is an impersonal moral decision, and activates different parts of the brain.

44. Morality and brain regions • For personal moral decisions, a rational moral decision process activates to generate an optimal decision – one death is better than five other deaths • For impersonal moral decisions, the area responsible for thinking about other people (superior temporal suculus, posterior cingulate, and medial frontal cortex) activate and produce confusion and a sub-optimal decision – one death is capital murder

45. Sympathy and Fairness • The ultimatum game • Two respondents • One gets $10 and decides how to divide it • The other decides to accept the offer or reject, in which case both get nothing • Economists thought most people would offer a nominal amount like $1 and keep the rest • The logical response is to accept any offer • Most people rejected low offers as “unfair” and walked away with nothing • Proposers anticipated this response, and actually made “fair” offers in the area of $5

46. Altruism • The desire to help others • The brain rewards altruism with a pleasurable feeling • Autism – people who can’t engage in or understand social interactions with others • Results in inability to sympathize with others • Mirror neurons aren’t developed

47. Resulting Decisions • Decisions feel “unanimous” to us • However, most decisions are the result of weighing multiple conflicting factors • Stimulate the NAcc and pacify the insula • Prime with highly coveted items • Use promotional stickers to make the deal seem like a good deal • Credit cards are less like “real money,” therefore result in more purchasing

48. Silencing cognitive dissonance • Brock and Balloun, late 1960’s • Two groups – regular churchgoers, committed atheists • Played tape recorded message attacking Christianity, with annoying static added • Listeners able to press button and remove static • Atheists removed the static, churchgoers did not - they each heard what they wanted

49. Parable of Cognitive Dissonance • Jewish tailor story (Plous p. 22) • The gang members tried to upset the tailor; when he paid them, he said they were making him happy; when he reduced the payment, they couldn’t justify their behavior • People are motivated to reduce psychological inconsistencies

50. Limitations of the Cortex • Cortex can only handle about seven data elements at once • Car buying involves dozens of features, options, etc. • Dijksterhuis categorized products with a complexity score • Simple things like simple kitchen tools (oven mitts) and home accessories (light bulbs) are easy • Complex things like furniture is very hard