Decision-Making Under Certainty
IEBE


We‘ll start with...
u… a test!


“Under Certainty”
uThere is no doubt as to which outcome will result from a given act
u“If I do X, Y happens“
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uRisk: “If I do X, there is 50% probability Y happens“
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uUncertainty: „If I do X, Y may happen. Or maybe not.“
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Preferences
uWhat is a preference?
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u“a greater liking for one alternative over another“
u
uBeing able to say “I like bananas more than apples”
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uA is preferred to B    OR    I am indifferent between A and B

Preferences
https://farm6.staticflickr.com/5827/22494238838_3e53899bd6_o.png


Rational preferences
uComplete
uTransitive
u
uViolations?
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uUtility
uu(apple) > u(orange)
u
uu(apple) > u(10 Kč)

Rational choice
uthe action chosen by a decision-maker is at least as good, according to his/her preferences, as
every other available action
u

Preferences
uInherent?
uConstructed?
u
u“In experiments, people are unable to estimate "fair" prices accurately and are strongly
influenced by the unconscious and irrational.” (W. Poundstone)

http://3.bp.blogspot.com/-nsV490O3oms/UPW2UL-HaNI/AAAAAAAAFjk/gDg3Za7Cvxg/s320/predictably_irration
al_illusion.png


Rational = consistent
C:\Users\206408\AppData\Local\Microsoft\Windows\INetCache\IE\MLNA29B6\money-clipart71[1].jpg
C:\Users\206408\AppData\Local\Microsoft\Windows\INetCache\IE\MLNA29B6\money-clipart71[1].jpg
C:\Users\206408\AppData\Local\Microsoft\Windows\INetCache\IE\MLNA29B6\money-clipart71[1].jpg
C:\Users\206408\AppData\Local\Microsoft\Windows\INetCache\IE\MLNA29B6\money-clipart71[1].jpg

Rational?
C:\Users\206408\AppData\Local\Microsoft\Windows\INetCache\IE\V2VX5INK\Cake[1].png
C:\Users\206408\AppData\Local\Microsoft\Windows\INetCache\IE\V2VX5INK\HD-Carrot-Cake[1].png
C:\Users\206408\AppData\Local\Microsoft\Windows\INetCache\IE\MLNA29B6\black_forest_cake[1].jpg
C:\Users\206408\AppData\Local\Microsoft\Windows\INetCache\IE\V2VX5INK\Cake[1].png

Rational?
uWine bottles:
u100  -  120
u120  -  140
u160  -  180
u180  -  200
u200  -  220
u220  -  240
u240  -  260
u100  -  260

http://www.cognitivepricing.com/uploads/3/0/2/8/30281035/5753912.gif?430






Decoy effect
uConsumers tend to have a specific change in preference between two options when also presented
with a third option that is asymmetrically dominated.
u
u An option is asymmetrically dominated when it is inferior in all respects to one option; but, in
comparison to the other option, it is inferior in some respects and superior in others.

Decoy effect

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Decoy effect



Decoy effect
Works with people too- you can make yourself more attractive by hanging around the right people


Compromise effect
uItems can gain market share when new options are added to the market when they become the
compromise or middle option in the choice set.

Compromise effect



Compromise effect
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Compromise effect
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Context dependent preferences
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Cheerleader effect
uHierarchical Encoding Makes Individuals in a Group Seem More Attractive (Psychological Science)


ttp://cdn.theatlantic.com/assets/media/img/posts/2013/11/Screen_Shot_2013_11_04_at_11.00.59_AM/eed0
4821f

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Anchoring effect
uHuman tendency to rely too heavily on the first piece of information offered (the "anchor") when
making decisions
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u
u
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u
u
u
u
u78 y.o. 3,776 m 28%
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Anchoring effect
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Anchoring effect
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Framing
ucognitive bias, in which people react to a particular choice in different ways depending on how it
is presented

Framing

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Framing
uPizza
u149.-  free delivery
u
u89.-    delivery 60.-
u
uFree pizza! (delivery 149.-)

Framing



Endowment effect
u
uPeople ascribe more value to things merely because they own them.
uPeople often demand much more to sell an object than they would be willing to pay to buy it.
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uLoss aversion: people dislike losses more than they like gains of the same size
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Endowment effect
WTA/WTP [$]


Endowment effect
uYou call to cancel your phone subscription
u
u
u“If you stay with us, we give you 100 free calls”
u
u“We have just credited your account with 100 calls”

Endowment effect



Preference construction WTA/WTP
uTom Sawyer effect


u
https://brendanstoodley.files.wordpress.com/2014/02/dsc_0246.jpg


Choice paralysis
uWith increased size of the choice set it becomes more difficult to pick the best option – or to
choose at all.
uCognitive overload
uRegret aversion (FOMO)
u

Choice paralysis
u


Paradox of Choice
uConsumer satisfaction?


Nudging, marketing research problems, manipulating by businesses
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For the seminar next week
uRead one paper, write 1-2 pages about it.
uThink of few examples of your own irrationality, or somebody else’s.

u