Lecture 3+4 : Measuring Utility

For this week's lecture we were asked to do the reading by Brandstatter, 'The Priority Heurisitic: Making Choices without Trade-Offs.' The reading was at first describing the Expected Utility and Value theories therefore giving us a bit of a refresh from Cognitive Psychology 2 module last year. It then however carried on to the prospect theory in which i know feel i have grasped a lot better than i did last year. It carried on to talk about this new idea of the priority heuristic. The expected utility and value theories were a bit easier to digest than the prospect theory and i was more aware of the basis of the theory of them, however after the class discussion the prospect theory was a lot clearer to me. With the prospect theory losses loom large than gains, so it takes into account that yes people do risk seek just as much if they think they are going to lose a lot of money as if they were going to win a lot. In the expected utility theory it didnt take into account that losses could be accounted for also. Decisions are made by basing their choices on a weighting function and a value of the prospect. It also accounts for the fact that small probabilities are over weighted and large ones are underweighted when making a decision.

An example of this would be a lottery ticket, the actual amount you spend is more than the probability of what you would be expected to win. Yet every week millions of people buy these tickets spend at least a £1.00 holding out for the small hope that they might win big.In class we then went on to discuss measuring utilities and conducted an exercise on utility functions. By asking questions relating to a series of choices i then plotted my results on two graphs, one for certainty equivalence and one for probability equivalence below.

You can see that with certainty equivalence in order to be indifferent between a lottery ticket with a 50/50 chance of winning £1000 or nothing the sum that would make me indifferent had to be £200. Any more and i would have definitely taken the money! Also when it came to the choice of either £1000 or £200 the sum of money i would get for certain was a lot higher at £500 as i was more willing to take a risk knowing i wasn't going to lose and get nothing, so it needed to be a larger amount to make me indifferent.

With the probability equivalence graph you can see that when more money is involved again the probability has to be higher for me to consider the risk in an equal light to the certain amount. However i'm never really game unless the probability is fairly high!! This is just my opinion but being a student money is precious and my decision making is NOT risk based!! As how it may have been a few years ago when i didn't have too much to gamble with and no debt!

The reading for next week is on decision framing, my group is reading the one by Mandel, Gain-loss, framing and choice. I'm hoping that im going to enjoy this and grasp it much easier than the previous two lectures as our group is struggling to decide which topic to do for our mid term wiki!!