Thoughts on week 4

This week we have been reviewing the subject of "Decision making under risk and uncertainty", looking at utility measures, expected utility theory and psychological theories.

Again, there were a few definitions that I picked up, which I find useful to remember:

• Utility - subjective value (as opposed to objective value), a measure of pleasure/displeasure or of usefulness


• Risk - probabilities that are known


• Uncertainty - probabilities that aren't known


• Prospect Theory - outcomes are coded as gains or losses from a reference point. The reference point is subjective & moveable and might be an expectation or an aspiration. A gain might actually be a psychological loss

We also looked at the Priority Heuristic, which I think can be thought of as another "fast & frugal" way of decision making.

An exercise was provided to measure our own utility function. The graph of my results is above (couldn't find out how to move it!). The measure looks at certainty equivalence and probability equivalence, with both methods producing the same results. Not quite the case for my graph! Considering why my 2 measures are not the same, I recalled that when I answered the first set of questions (certainty equivalence) I felt as if I was putting in the "right" answers, i.e. what was logical. When I answered the second set of questions (probability equivalence), I had to think much more about this and was less certain of my answers. I also felt that I needed to amend my answers to the first set of questions, to answer them more "truthfully" than rationally. A very interesting exercise, which I'll go back and do again sometime to see if I answer differently having been through this current thought process. In the meantime, no more snappy decisions!!