The priority heuristic: Making choices without trade-offs.

Abstract

Bernoulli's framework of expected utility serves as a model for various psychological processes, including motivation, moral sense, attitudes, and decision making. To account for evidence at variance with expected utility, the authors generalize the framework of fast and frugal heuristics from inferences to preferences. The priority heuristic predicts (a) the Allais paradox, (b) risk aversion for gains if probabilities are high, (c) risk seeking for gains if probabilities are low (e.g., lottery tickets), (d) risk aversion for losses if probabilities are low (e.g., buying insurance), (e) risk seeking for losses if probabilities are high, (f) the certainty effect, (g) the possibility effect, and (h) intransitivities. The authors test how accurately the heuristic predicts people's choices, compared with previously proposed heuristics and 3 modifications of expected utility theory: security-potential/aspiration theory, transfer-of-attentionexchange model, and cumulative prospect theory.Keywords: risky choice, heuristics, decision making, frugality, choice process Conventional wisdom tells us that making decisions becomes difficult whenever multiple priorities, appetites, goals, values, or simply the attributes of the alternative options are in conflict. Should one undergo a medical treatment that has some chance of curing a life-threatening illness but comes with the risk of debilitating side effects? Should one report a crime committed by a friend? Should one buy an expensive, high-quality camera or an inexpensive, low-quality camera? How do people resolve conflicts, ranging from the prosaic to the profound?The common denominator of many theories of human behavior is the premise that conflicts are mastered by making trade-offs. Since the Enlightenment, it has been believed that weighting and summing are the processes by which such trade-offs can be made in a rational way. Numerous theories of human behavior-including expected value theory, expected utility theory, prospect theory, Benjamin Franklin's moral algebra, theories of moral sense such as utilitarianism and consequentionalism (Gigerenzer, 2004), theories of risk taking (e.g., Wigfield & Eccles, 1992), motivational theories of achievement (Atkinson, 1957) and work behavior (e.g., Vroom, 1964), theories of social learning (Rotter, 1954), theories of attitude formation (e.g., Fishbein & Ajzen, 1975), and theories of health behavior (e.g., Becker, 1974; for a review see Heckhausen, 1991)-rest on these two processes. Take how expected utility theory would account for the choice between two investment plans as an example. The reasons for choosing are often negatively correlated with one another. High returns go with low probabilities, and low returns go with high probabilities. According to a common argument, negative correlations between reasons cause people to experience conflict, leading them to make tradeoffs (Shanteau & Thomas, 2000). In terms of expected utility, the trade-off between investment plans is performed by weighting the utility of the respective ...

From anomalies to forecasts: Toward a descriptive model of decisions under risk, under ambiguity, and from experience.

“…Brandstätter, Gigerenzer, and Hertwig (2006) show that it is also possible to find a simple heuristic that can explain the anomalies that motivated prospect theory in the first place (see Rows 1 to 4 in Table 1). …”

Preference Change through Choice

“…In the study of risk and decision-making in both economics and psychology, an almost universally employed tool is hypothetical monetary gambles (e.g., Abdellaoui, 2000;Birnbaum, 2008;Brandstätter, Gigerenzer & Hertwig, 2006;Tversky & Wakker, 1995). By studying how people behave when faced with potential losses and gains under different probability conditions, models are constructed for behavior under risk and uncertainty (e.g., Gonzalez & Wu, 1999;Prelec, 1998;Wakker, 2004).…”

How Representations of Knowledge Shape Actions

“…Another class of models designed to describe both the process and outcome of choice are cognitive choice heuristics (see Brandstätter, Gigerenzer, & Hertwig, 2006 ). Heuristics can be separated into two classes: those that use solely outcome information and exclude probabilities (outcome heuristics), and those that use at least rudimentary probability information (dual heuristics).…”