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Rational decisions

Rational decisions. Decision theory. Normative: how to deliberate rationally? Descriptive: the psychology of decisions. Why are we rational or irrational in certain cases?. Rational decision in general. Exercise. How do you choose a mobile phone or a car?. Példa: autóvásárlás.

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Rational decisions

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  1. Rationaldecisions

  2. Decision theory • Normative: how to deliberate rationally? • Descriptive: the psychology of decisions. Why are we rational or irrational in certain cases?

  3. Rational decision in general

  4. Exercise • How do you choose a mobile phone or a car?

  5. Példa: autóvásárlás

  6. Rational decision method • Model of rational decision • Define the problem • Evaluate the stakes: what are the risks? What are the possible losses? • Understand the problem: gather information, reframe the situation. • Fix your approach for the solution.

  7. Rational decision 2 • Explore as many possible solutions as you can. • Attribute weights to different criteria according to their importance to you. • Si – The weight of a solution according to criteria i. • Estimate the probability of different solutions. • Pmi: m solution will pay out with P probability according to criteria i. • Calculate: • Subjective expected utility of every possible solution and choose the best. • Hm :Expected subjective utility of a certain solution • Hm= ∑ si * pmi

  8. Decision table

  9. Exercise • Make a rational decision: should you play lottery this week? • The jackpot is 900 million Ft and no one else will get jackpot.

  10. Using a decision tree Utility of differentoutcomes Expectedutility of differentoutcomes Lehetőségek Problem My numbers win 900 mFt + big happyness ≈ 1000mFt 1000mFt*pr=22,7 Ft pr Yes 1-pr -225Ft + small happyness ≈ -300 Ft 300*(1-pr)≈-300Ft My numbers don’t win Play lottery? My numbers win pr ≈-2,3Ft 0Ft+ big happyness ≈ -100 mFt No 1-pr My numbers don’t win ≈225Ft 0Ft+small happyness≈ 225 Ft pr≈ 1/44 000 000

  11. Decide with the help of decision tree • I play lottery: H1= 22,7+(-300)=-277,3 Ft • I don’s play lottery: H2= -2,3+225=222,7 Ft • H1H2The rationalchoice is not to play lottery.

  12. Comparing decision table with decision tree Decision table Decision tree Event-based Can handle uncertainty • Property based • Best if after the action there are no uncertainties.

  13. Comparing decision table with decision tree 2. Decision table Decision tree Helps to take into account the possible events relevant to your decision. Helps to take into account external factors that might affect your decision. Helps to understand multiple step decisions. • Helps to clarify the criteria • Focuses your attention to framing the problem and reflecting on the different evaluative criteria.

  14. Limits of rational decision • Defining the problem • Assigning your preferences (weights) • Limits of information (options, probabilities) • Most of our decisions are boundedly rational.

  15. Bounded rationality • Bounded rationality in decisions • Does not maximize utility • Does not optimalize the decision • Only seeks a satisfycing solution. • Choose the most important criteria • Choose the first solution that appers to be good enough.s

  16. Homework • Describe a decision problem of your own. • Analyze the problem with decision tables and trees. • Create a decision table for the problem • Assign weights to the different criteria • Try to reframe the problem at least once • Draw a decision tree of the problem • Compare your results achieved by both of these methods.

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