TD L3 L4

• evaluation of evidence
• ie how likely is it to rain

selecting a course of action

• Normative
• Descriptive
• Prescriptive

• norm of how we ought to think in an ideal world to achieve ideal outcomes 
• optimisation or consistency

describes how limitedly rational beings actually or typically think in the real world with less than ideal outcomes

• prescribes how limitedly limited beings can or should think in the real world to achieve closer to ideal outcomes 
• derived from normative theories

• Monty Hall Problem 
• Bayes Theorem
• conjunctive & disjunctive events
• expected value and expected utility

• P(A)= probability of A
• P(A&B) = P(A) * P(B) = probability of A and B
• P(A|B) = probability of A, given B

• base rate, baseline estimate
• best estimate before new info

• confusion of the inverse (test comes back 90% positive if have cancer vs 90% chance of cancer )
• ignoring false alarm rate (no cancer but positive result)
• ignoring prior probabilities (what percentage of people like THIS have cancer)

• compound/"and" events
• everything must be right to ensure a successful outcome (one error ruins everything)

less likely than any of their parts.

• compound event/"or" events
• only one piece needs to be right to ensure a successful outcome

 at least as likely as any of their parts.

• use prior probabilities more appropriately 
• break compound events into single events

• objective monetary value 
• applies for options that are certain

monetary value AND likelihood of each outcome

EV = p(heads)(*(v(heads) +(p(tails)(*(v(tails)

subjective value, measured in "utils"differs across people and situations

subjective value and likelihood of each outcome

subjective value and subjective likelihood

• V: objective monetary value 
• – doesn’t vary across people or situations

• EV: objective monetary value and objective  probability
• – varies across situations, but not people

• U: subjective value
• – varies across people and situations

• EU:subjective value and objective probability
• – varies across people and situations

• SEU: subjective value and subjective probability
• – varies across people and situations
• – most idiosyncratic

• people should choose the option with the highest EV (EV to predict behaviour)
• keep in mind diminishing the marginal utility
• issue is pricing non-monetary outcomes

• deals with issues of expected value theory
• an explicit set of axioms (assumptions) that underlie rational decision making

**violated axiom = not maximised SEU

• 1. connectedness (rank alternatives)
• 2. dominance (pick dominant alternative)
• 3. transitivity (a>b and b>c, then you must prefer a>c).
• 4. independence (ignore similar info look at differences)

mainly to do with phrasing and our tendencies to drift towards loss aversion. Can rephrase 2 options so it's essentially the same thing (e.g. 90 percent to live and 10% to live, same thing)