70-386 Behavioral Decision Making

70-386 Behavioral Decision Making Lecture 7: Framing

Administrative • Quiz 2 • Results hopefully by Tuesday… • Exam 1: Sunday (one week) • 2nd paper presentation: Tuesday • Procrastination and deadlines.

Last time • Conjunctive and Disjunctive events. • Hindsight and Curse of Knowledge • FAE • Actor-Observer bias

Bounded awareness Quiz bonus question (2-parted) (2 points – all or none) http://www.youtube.com/watch?v=Ahg6qcgoay4 • Part 1: how many passes does the team in white make?

Bounded awareness Quiz bonus question (2-parted) (2 points – all or none) Part 2: Which of the following passed through the scene? • A person in a bear suit • A person in a gorilla suit • A person in a business suit • None of the above General tendency to not notice what you aren’t looking for, even when you are looking directly at it, is called inattentional blindness. • Other situations where inattentional blindness may be an issue? • A driver on their cellphone failing to notice another car in front of them. • Completely not noticing something that your spouse told you while you were paying attention to something else.

Change blindness • Change blindness on the other hand is where we often fail to notice very obvious changes in our environment. • Comical example is people changing • http://www.youtube.com/watch?v=vBPG_OBgTWg • Change blindness does not only occur for visual stimuli, but for a variety of important behaviors. Examples? • For example, the auditor of a company may approve some statements that stretch the boundaries of ethical standards one year. • The next year, the auditor may approve statements that are clearly unethical and possibly illegal. • However, if the company changed from being completely ethical to performing blatantly illegal reporting practices the next year, the auditor may have been more likely to notice the change in reporting standards and to report the company for its illegal practices. • Much like the accountant, we too are also prone to a slippery slope of ethical behavior

Asian Disease Imagine that Qatar is preparing for the outbreak of an unusual Asian disease that is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientiﬁc estimates of the consequences of the programs are as follows. Program A: • If Program A is adopted, 200 people will be saved. Program B: • If Program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved. Which of the two programs would you favor?

You shouldn’t gamble, but… You have the choice between • receive $10 million for sure (expected value = $10 million) • ﬂip a coin and receive $22 million for heads but nothing for tails (expected value = $11 million). What would you do?

Lawsuits You are being sued for $500,000 and estimate that you have a 50 percent chance of losing the case in court (expected value = –$250,000). The other side is willing to accept an out-of-court settlement of $240,000 (for sure –$240,000). Ignoring attorney’s fees, court costs, aggravation, and so on, would you prefer to • ﬁght the case • settle out of court

African Disease Imagine that Qatar is preparing for the outbreak of an unusual African disease that is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the scientiﬁc estimates of the consequences of the programs are as follows. Program C: • If Program C is adopted, 400 people will die. Program D: • If Program D is adopted, there is a one-third probability that no one will die and a two-thirds probability that 600 people will die. Which of the two programs would you favor?

Framing • A “decision frame”is the decision-maker’s conception of the acts, outcomes, and contingencies associated with a particular choice • Gain vs Loss • Allow vsForbid • How a decision-maker frames the choice can effect her choice • Preference reversals • Risk adverse when framed as a gain • Risk seeking when framed as a loss

Framing: Survey Results A hurricane is threatening 12 identical oil platforms that your company is building in the Gulf of Mexico. It doesn't look good for them. A structural engineer proposes two possible courses of action: Plan A and Plan B. If you decide on Plan A, 4 platforms will be saved. If you decide on Plan B, there is a 1/3 probability that all 12 will be saved, and a 2/3 probability that none will be saved. Which plan do you favor? Plan A or Plan B A hurricane is threatening 12 identical oil platforms that your company is building in the Gulf of Mexico. It doesn't look good for them. A structural engineer proposes two possible courses of action: Plan A and Plan B. If you decide on Plan A, 8 platforms will be lost. If you decide on Plan B, there is a 1/3 probability that none will be lost, and a 2/3 probability that all 12 will be lost. Which plan do you favor? Plan A or Plan B No mathematical difference. Just “saved” vs “lost”

Presentation Effects / Framing: Examples How you ask can determine the answer

Next time • More framing examples • Finish JMDM chapter 5 • Prospect Theory • RCUW chapter 12

70-386 Behavioral Decision Making