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Pascal and gambling logic
1
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Early decision theory & utility maximization
30
Bla ise Pasca l, Mathe m atic ian
https://en.wikipedia.org/
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decisions, decisions…
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Lotte ry t icke t cos ts $ 45.It has a 50% chance of winning $ 200
Caplin, Andrew and Paul W. Glimcher (2014) in “Basic Methods from Neoclassical Economics” in Neuroeconomics: Decision Making and The Brain.
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Exp e c te d va lue = the p rob ab ility of winning X the am ount to b e won
b uy ticke t
Caplin, Andrew and Paul W. Glimcher (2014)
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Consider a poor person…
Caplin, Andrew and Paul W. Glimcher (2014)
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I’ll give you $7,000 for
the ticket.
??
Caplin, Andrew and Paul W. Glimcher (2014)
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Daniel Bernoulli:one should maximize
expected utilityHe makes a distinction between:
expected value and expected utility.
35Caplin, Andrew and Paul W. Glimcher (2014)
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Prospect Theorypeople evaluate potential changes in
relative wealth,not absolute wealth
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50/50 chance of wining $1000 or $0
Get $500
Choose between:
Start with
$1000
50/50 chance of losing 1000 or 0
Lose $500
Choose between:
Start with
$2000
Famous Kahneman and Tversky experiment:
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38Zeelenberg, M and van Dijk, E. (1997) Journal of Economic Psychology 18
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Fear of losing>
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reference dependence
● Prospect Theory says that people evaluate potential changes in RELATIVE wealth, not in absolute wealth states.
● This is the most central idea in behavioral economics
● It will exert its influence in many key decisions.
When faced with a risky decision we think less about out bank account and more
about weather we will be better or worse off afterward.
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https://www.youtube.com/watch?v=YpiGVWO-C64
Loss Aversion and Endowment Effect
Dan Ariely
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Everyday example of
reference points
Consumer’s love sales!
Marketers love sales because it is a reference point to the regular price
Not saving money when buying something at 20% off.
However, if one adopts the reference point of the merchandise as the regular price then the sale of 20% can seem psychologically like savings.
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Is the left center circle larger?
47www.123opticalillusions.com
Is the top yellow line longer? ?
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Are these lines straight or crooked?
48www.123opticalillusions.com
?
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Range representation
How do you represent
something with sufficient
range to accommodate big
numbers and sufficient
precision to resolve differences
between small numbers?
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Hu m a ns c a n se e ove r a lig h t in t e ns it y ra ng e of se ve ra l m illion t o one .50
10,000,000:1
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At night, tiny changes in absolute brightness change the neurons firing rate
During the day, in bright light, the reference point increases and greater changes in absolute brightness are required to alter the firing rate of a neuron.