Certainty Equivalence and Probability Equivalence

For those who know me, the result on my Certainty Equivalence graph is not at all surprising! The few times I have gambled in the past, not once have I won, so if I was to be offered a definite sum of £500 (which I chose as the sum that would make me indifferent between the other two options in this scenario), I would accept it, no questions asked. And what follows in my first graph does not get much more exciting than that. The sums of money I have chosen in the other two scenarios is (according to me) a completely sensible £250 followed by a nice and safe £750. If my financial situation had been a bit different, I would have chosen my sums differently too. So would I most likely have done if my previous experiences had been different in the past, as well as if I actually enjoyed gambling. In other words: my Certainty Equivalence graph suggests that I am risk averse.

As for my second graph, things change slightly. Simply, would there be a chance of me being given a value for certain, I am highly likely to settle. So in the first two scenarios the probability percentage I chose of winning the gamble is 95 % on both of them. Then, finally, in the third scenario in the Probability Equivalence graph I chose a 75 % of winning the gamble since the amount of value which was given for certain was low (£250). This does on the other hand, compared to my Certainty Equivalence graph, suggest that I have a risk seeking attitude. In this case, the profit of winning this bet out takes the possibility of a loss.

The Priority Heuristic.

My immediate reaction to the earlier mentioned article The Priority Heuristic: Making Choices Without Trade-Offs by Brandstätter, Gigerenzer and Hertwig (2006) was confusion. I found the whole experience very different from the Dhami article which I was reading in the week before, and really enjoyed. After reading about the Priority Heuristic over and over again I didn’t get much wiser! It was only on Friday’s lecture that things started falling into place and now I have a bigger understanding about what the Priority Heuristic and the three steps it consists of is about. I also found the explanations of the Utility Theory and the Prospect Theory very helpful to me, but, to be honest, I did find the article very hard. I spent most of my time studying the parts of the text which explained the concept of mathematical expectation, hoping that once I got my head around that bit it would all make sense, and once I focused less on those calculations, and more on the written words and figures, I felt a bit more confident. But it left me wondering: is there anything in the world of Cognitive Psychology that is just logical? But then again, I guess an article based on examples like Richard Branson’s satisfaction if given a thousand pounds would not be appreciated by Cognitive Psychologists worldwide, although it would make my life so much easier.