LE2 - Foundations

System 1

• fast, automatic, emotional, unconscious

• Tasks

  • 2+2, sudden sound, read words on billboards

• skills are born or become automatic

• always active

System 2

• slow, effortful, logical, conscious

• Tasks

  • focus on a voice from 1 in a group, look for a person with red jacket in crowd, check validity of compley logical argument

• neccessary condition: focus and attention

• treatment structure

  • gruppe 1 bekommt geld, gruppe 2 nichts

• beetween / within subjects

• incentives

  • typically monetary incentives

  • limit budget: prize winner

• replication

  • repeat event

  • gießen + milwaukee gleiche studie

• control

  • possibility to controll extraneous factors

System 1 -> impressions become beliefs -> 2

System 2 -> takes over when needed

• MIT Studenten am besten abgeschlossen

• more reflective people are more patient as they choose the later larger reward

• correlation between Score and cognitive measures

• high correlation between cognitive reflection and college admission

under risk

• probabilities of occurence available or at least assessable

under uncertainty

• probabilities of occurence unknown and impossible assess

objective

• probability to roll a 3

subjective

• tommorow’s rain probability

• Prior probability: 𝑝(𝑦𝑖)

• Conditional probability likelihoods : 𝑝(𝑠𝑗|𝑦𝑖)

• Posterior probability: 𝑝(𝑦𝑖|𝑠𝑗)

• 𝑝𝑦1∗𝑝(𝑠1|𝑦1) // £ 𝑝(𝑦)∗𝑝(𝑠1|𝑦𝑘)

positive

• good to infer likelihood of unobservable event from an observable signal

negative

• difficulties whet it comes to implementation of bayesion updating

=> in reality: people tend to make mistaks when faced with the challenge of updating probabilities

=> prominent bias: base rate neglect

• value function V

• E(a) = £ (p*a)

• theoretisch unendlich Gewinn möglich

• warum setzen Leute begrenzt Einsatz?

  • Leute achten nur auf expected utility

  • vergessen expected value zu bewerten

• gutes Beispiel für utility function U = ln(x)

• Certainty equivalent (CE)

  • CE = e^E(ln(U(x))

• Risk Premium (RP)

  • RP = E(x) - CE

risk aversion

• E (U(x)) < U (E(x))

• Nutzen vom erwarteten Value ist größer als erwartete Nutzen

• its not avoiding risk -> acceptance of risk in excahnge for compensation

• e.g.: St. Petersburg lottery, insurance policy, investment

• utility function assigns utility value

• higher expected utility (E(U)) -> stronger preference

• axiomatix system => acception axiom => accepting EUT

• Kern der rational decision theory

Step 1

• alle Outcomes aufzählen

Step 2

• Ranking Outcomes

Step 3

• Indifferenzwskt für jedes Ereignis erstellen

Step 4

• Entscheidung auswerten anhand expected utility

• eignet sich nicht als deskriptive theory

  • => knowing all decision implications, the underlying axioms would not be accepted in the first place

St Petersburg lottery

between subject

• 2 untergruppen mit unterschiedlichen treatments

within subject

• jeder Teilnehmer durchläuft beides

• replication

  • jederzeit wieder durchführbar

• control

  • control the extraneous factors

real

• higher stakes leads to risk aversion

hypothetical

• no significant effect