risky business dopamine and rewards Mary ET Boyle, Department of Cognitive Science, UCSD

Transcription

1 risky business dopamine and rewards Mary ET Boyle, Department of Cognitive Science, UCSD

2 We face risk everyday. Which class to take? Who to date? What s my major? What to do this summer? 2

3 We rarely know in advance and with certainty what the outcome of our decision will be. We are forced to make tradeoffs between the pros and cons of the potential outcomes and their probability of happening. 3

4 The many definitions of risk Lay person associates risk with hazards and lack of familiarity. 4

5 The many definitions of risk Business person associates risk as a challenge to overcome. 5

6 The many definitions of risk Medical clinicians associates risk as exposure to loss or harm. 6

7 The many definitions of risk Decision economists associate risk as increasing with variance in the probability distribution. 7

8 Regardless of whether a potential loss is involved. 8

9 Which is considered more risky? Heads: $100 Tails: $0 9

10 Decisions under risk Decisions under uncertainty Decision maker knows with precision the probability distribution of possible outcomes. Decision maker must assess the probabilities of potential outcomes that are vague. 10

11 prospect theory Models what people actually choose versus what they should choose

12 reference dependence 12

13 bias decisions 13

14 Law of Diminishing Marginal Utility traditional economics 14

15 The perceived value of, or satisfaction gained from, a good to a consumer declines with each additional unit acquired or consumed.. if consumption continues, sickness (disutility) will result. 15

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17 All units of the commodity should be of the same weight and quality. 17

18 There should be no change in the tastes, habits, customs, fashions and income of the consumer. A change in any one of them will increase rather than diminish utility. 18

19 There should be continuity in the consumption of the commodity. Units of the commodity should be consumed in succession at one particular time. 19

20 Units of the commodity should be of a suitable size. Giving tiny apples to a hungry person would increase the utility of the subsequent apple! 20

21 Prices of the different units and of the substitutes of the commodity should remain the same. 21

22 The commodity should not be indivisible. 22

23 Goods should be of an ordinary type. If they are commodities, like diamonds and jewels, or hobby goods like stamps, coins or paintings, the law does not apply. 23

24 Marginal utility of money changes as a person acquires more and more money. 24

25 traditional economics value of money $1,000 Which one feels subjectively greater?

26 1 2 The value of an additional $1,000 increment is influenced both the intrinsic value of the extra $1,000 and by how many $1,000 s of dollars the decision-maker has. The graph shows the value of any given number of $1,000. Note, that as the total number of $1,000 dollars possessed increases, the value of an additional $1,000 diminishes. value 3 Thus if a person possesses no money at all, a $1000 is of tremendous value. If a person possesses tens of thousands of dollars, then the value to them, of an additional $1,000 would be low. $1,000 increments 26

27 We don t process information in absolute terms. 27

28 Pascal and gambling logic 1

29 Early decision theory & utility maximization Blaise Pascal, Mathematician 29

30 decisions, decisions Lottery ticket costs $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. 30

31 buy ticket Expected value = the probability of winning X the amount to be won Caplin, Andrew and Paul W. Glimcher (2014) 31

32 Consider a poor person Caplin, Andrew and Paul W. Glimcher (2014)

33 I ll give you $7,000 for the ticket.?? Caplin, Andrew and Paul W. Glimcher (2014)

34 Daniel Bernoulli: one should maximize expected utility He makes a distinction between: expected value and expected utility. Caplin, Andrew and Paul W. Glimcher (2014) 34

35 2 Prospect Theory people evaluate potential changes in relative wealth, not absolute wealth

36 Zeelenberg, M and van Dijk, E. (1997) Journal of Economic Psychology 18 36

37 Your bonus: let s flip a coin

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39 Compare that with>

40 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. reference dependence 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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42 Everyday example of reference points

43 Is the left center circle larger? Is the top yellow line longer?? 43

44 Are these lines straight or crooked?? 44

45 How do you represent som ething with su fficient ran ge to accom m odate big num bers and su fficient precision to resolve differences betw een sm allnum bers? Range representation

46 10,000,000:1 Humans can see over a light intensity range of several million to one. 46

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49 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.