#### Transcript Document

Or

### Why We’re Not Really As Rational As We’d Like to Believe

## Kahneman and Tversky:

### •The Value Function •The Risk Function •Reference Points

### The Value Function

For gains people are risk averse For losses people are Risk Seeking Steeper Curve for losses than for gains.

Imagine that the United States is preparing for the outbreak of an unusual disease, which 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 program are as follows:

**If program A is adopted 200 people will be saved If program B is adopted, there is a 1/3 probability that 600 people will be saved, and a 2/3 probability that no people will be saved.**

Imagine that the United States is preparing for the outbreak of an unusual disease, which 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 program are as follows:

**If program A is adopted 400 people will die.**

**If program B is adopted, there is a 1/3 probability that no people will die, and a 2/3 probability that 600 people will die.**

Two gains A)A two hour lecture by Danny B) 2 one hour lectures by Danny

Two losses A)A twenty minute shock B) 2 ten minute shocks

### The Risk Function

Overweighting of small percentages Underweighting of large percentages Certainty is a special case 0 probability 100

Lotteries Medical Warnings 0 probability 100

### Which do you prefer: Option A 5% of $12 5% of $14 90% of $96 Option B 10% of $12 5% of $90 85% of $96

5% of $12 5% of $12 90% of $96 10% of $12 and 90% of $96 10% of $12 5% of $96 85% of $96 5% of $12 5% of

*$14*

90% of $96 10% of $12 5% of

*$90*

85% of $96

You are lying on the beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite beer. A companion gets up to make a phone call, and offers to bring back a beer from the only nearby place where beer is sold, a fancy resort hotel. He asks how much you are willing to pay for the beer. Assuming your friend would not inflate the price, what price do you tell him?

You are lying on the beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite beer. A companion gets up to make a phone call, and offers to bring back a beer from the only nearby place where beer is sold, a small, run-down grocery store. He asks how much you are willing to pay for the beer. Assuming your friend would not inflate the price, what price do you tell him?

## Summary:

### •The Value Function •The Risk Function •Reference Points

Why Self-Report Fails: Split brain Priming Studies Other manipulations

1) No Self-Reports 2) Knowing when the system fails, helps us understand how the system works 3) The most persuasive evidence is counter intuitive 4) Soooo much fun!

Do more people die each year from shark attacks or being hit by falling coconuts?

### Vs.

On his way out, Sanders staggered against a serving table, knocking a bowl to the floor On his way out, Sanders staggered against a serving table, knocking a bowl of guacamole dip to the floor, and splattering guacamole on the white shag carpet

Jack is a 45 year old male. He is generally conservative, but shows little interest in political or social issues. He spends his free time on his hobbies which include HAM radio and mathematical puzzles. The probability that Jack is one of 30 engineers in a sample of 100 individuals is _____%

Jack is a 45 year old male. He is generally conservative, but shows little interest in political or social issues. He spends his free time on his hobbies which include HAM radio and mathematical puzzles. The probability that Jack is one of 70 engineers in a sample of 100 individuals is _____%

In a random group of five people, which set of birthdays is more likely: March 5 th , Jan 26 th , July 17 th , August 1 st , August 12 th May 1 st , May 3 rd , May 5 th , May 7 th , May 9th

Assume the following: 1 out of 1000 women who gets a mammogram has cancer Mammograms detect 99% of breast cancer cases Mammograms have a .5% false alarm rate What are the odds that a woman who tests positive actually has cancer?

Cancer Detected No Cancer Detected Has Cancer 99 1 No Cancer 500 99400 Only 1 in 6 women who have cancer detected actually have cancer!!!

You have 10 seconds to estimate the answer to the following problem: 10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = _____

You have 10 seconds to estimate the answer to the following problem: 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 x 9 x 10 = _____

(Actual answer = 3628800) Estimations are biased even for absurd anchors!

Is Danny older than 65?

Is Danny younger than 10?

How old is Danny?

RULE: If a card has a vowel on one side, then it has an odd number on the other.

Which cards do you have to turn over to know if the rule is true?

A B 1 2

RULE: If somebody is drinking, they must be over 21 years of age Which cards do you have to turn over to know if the rule is true?

Drink Not Drink 21 18

### People don’t want to have to change from the current situation, and require great incentive to do so.

The mean IQ of the population of 8 th graders is

*known*

to be 100. You have selected a random sample of 50 children for a study on educational achievements. The first child you test has an IQ of 150. What do you expect the mean IQ to be for the whole sample?

What are the odds that in the next 10 years India and Pakistan will get involved in a nuclear war, which will draw in other nuclear powers such as the United States and Russia leading to an all out Nuclear war.

What are the odds that in the next 10 years United States and Russia will be involved in an all out Nuclear War?

1) Prospect Theory’s Value Function, Risk Function, and Reference Points make it the premier Decision Making Theory 2) Errors are an excellent way of examining how we think 3) We use heuristics to lighten the cognitive load of difficult tasks 4) Making your friends look irrational advances the cause of science