Professional Documents
Culture Documents
Making
Intuition, Heuristics & Framing
Examples of heuristics?
Everyday life.
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Problem 1, Group 1
Surgery: Of 100 people having surgery 90 live through
the post-operative period, 68 are alive at the end of the
first year, and 34 are alive at the end of five years.
Radiation therapy: Of 100 people having radiation
therapy all live through the treatment, 77 are alive at
the end of one year, and 22 alive at the end of five
years.
What treatment strategy would you choose?
Source: Rational Choice and Framing of Decisions, Tversky & Kahneman
IIMC PGPEX 2015-16, Term 5
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Problem 1, Group 2
Surgery: Of 100 people having surgery 10 die during
surgery or the post-operative period, 32 die by the end
of the first year, and 66 die by the end of five years.
Radiation therapy: Of 100 people having radiation
therapy, none die during treatment, 23 die by the end
of one year, and 78 die by the end of five years.
What treatment strategy would you choose?
Source: Rational Choice and Framing of Decisions, Tversky & Kahneman
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Problem 2
Imagine that you face the following pair of concurrent decisions.
First examine both decisions, then indicate the options you prefer.
Decision 1 Choose between:
(84%)
A. Sure gain of $240
B. 25% chance to gain $1000 and 75% chance to gain nothing. (16%)
AND
Decision 2 Choose between:
(13%)
C. a sure loss of $750
D. 75% chance to lose $1000 and 25% chance to lose nothing
(87%)
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B & C: 25% chance to win $250 and 75% chance to lose $750
Problem 2
Imagine that you face the following pair of concurrent decisions. First
examine both decisions, then indicate the options you prefer.
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Prospect Theory*
Perception is reference dependent
Changes are the bases of reference
Changes in (not status of) health, wealth,
happiness, emotions
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Risk averse
Perceived value
Risk taking
Source: Kahneman & Tversky
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Decision failures
Launch of New Coke
Context of declining market share perceived
LOSS frame
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