Rationality Myth
How & Why People Make Weird Choices
„Man is a rational animal – so at least I have been
told. Throughout a long life I have been looking
diligently for evidence in favour of this
statement, but so far I have not had the good
fortune to come across it.“
B. Russell
 What does “RATIONAL” mean?
 Reasonable & logical
 Unbiased by emotions
 Optimal, given the information available
 Expected Utility Theory:
Expectancy × Value
Set A:
24 pieces
 Dinner plates 8, all in
good condition
 Soup/salad bowls 8, all in
good condition
 Dessert plates 8, all in
good condition
Set B:
31 pieces
 Dinner plates 8, all in
good condition
 Soup/salad bowls 8, all in
good condition
 Dessert plates 8, all in
good condition
 Cups 8, 2 of them broken
 Saucers 8, 7 of them
broken
Hsee, C. K. (1998). Less is better: When low-value options are valued more highly
than high-value options. Journal of Behavioral Decision Making, 11, 107-121.
Three groups:
Hsee, C. K. (1998). Less is better: When low-value options are valued more highly
than high-value options. Journal of Behavioral Decision Making, 11, 107-121.
Offered price
Set A(24pcs)
Offered price
Set B (31pcs)
Group 1 –
simultaneous
evaluation
$ 30 $ 32
Group 2 – Set A
only $ 33 Group
B – Set B
only - $ 23
Dictionary A:
 Published 1993
 10,000 entries
 Like new
Dictionary B:
 Published 1993
 20,000 entries
 Cover torn, otherwise
like new
Hsee, C. K. (1996). The evaluability hypothesis: An explanation for preference
reversals between joint and separate evaluations of alternatives. Organizational
behavior and human decision processes, 67(3), 247-257.
Three groups:
Offered price
Dictionary A
Offered price
Dictionary B
Group 1 –
simultaneous
evaluation
$ 19 $ 27
Group 2 –
Dictionary A only $ 24 Group
B –
Dictionary B only - $ 20
Hsee, C. K. (1996). The evaluability hypothesis: An explanation for preference
reversals between joint and separate evaluations of alternatives. Organizational
behavior and human decision processes, 67(3), 247-257.
 Preference reversal
In certain conditions, our preferences and/or
evaluations may change even though the
attributes of the objects remain the same.
Rational prioritization (transitive):
A is more than B is more than C
Irrational prioritization (intransitive):
A is more than B is more than C is more than A
amount amount amount
defect defect defect
 Preference reversal
 Evaluability effect
Our evaluation of options is only based on the
information immediately available.
We do not consider relative value of possible
alternatives if they are not available.
Rational thinking /
decision making
Irrational thinking /
decision making
HEURISTICS
 Preference reversal
 Evaluability effect
 Anchoring
Initial information on one of the alternatives
profoundly influences our evaluation of
subsequent alternatives = RELATIVE EVALUATION.
 Preference reversal
 Evaluability effect
 Anchoring
 Loss aversion
We invest more into avoiding losses than into
achieving gains (of the same value).
When negative information is available, we tend to
give it special attention and prioritize it.
Daniel Kahneman Amos Tversky
Behavioural economics
People avoid risk and uncertainty.
(Daniel Bernoulli)
Unfortunately, most of our decision-making
involves risk and – especially – uncertainty.
Risk = I know the probability of outcome (e.g.
gambling – probability of winning can be
computed)
Uncertainty = I don’t know the probability of
outcome
Situation A:
You have been given
$1,000. You are now
asked to choose one of
these options: 50%
chance to win $1,000
OR get $500 for sure
50% chance of $1,000 or $2,000
OR
100% chance of $1,500
Situation B:
You have been given
$2,000. You are now
asked to choose one of
these options: 50%
chance to lose $1,000
OR lose $500 for sure
50% chance of $1,000 or $2,000
OR
100% chance of $1,500
Kahneman & Tversky
Certain $1,500 Uncertain $1,000
or $2,000
Situation A:
$1,000 given
50% chance to win
additional $1,000 OR
get $500 for sure
YES!!! No, thanks.
Situation B:
$ 2,000 given
50% chance to lose
$1,000 OR lose $500
for sure
Not if I can avoid
it.
THANKS FOR
THE CHANCE!!!
Certain $500
gain
Uncertain $1,000
or $0 gain
Situation A:
$1,000 given
50% chance to win
additional $1,000 OR
get $500 for sure
YES!!! No, thanks.
Situation B:
$ 2,000 given
50% chance to lose
$1,000 OR lose $500
for sure
Not if I can avoid
it.
THANKS FOR
THE CHANCE!!!
Certain $500 loss Uncertain $1,000
or $0 loss
Situation A:
$1,000 given
50% chance to win
additional $1,000 OR
get $500 for sure
YES!!! No, thanks.
Situation B:
$ 2,000 given
50% chance to lose
$1,000 OR lose $500
for sure
Not if I can avoid
it.
THANKS FOR
THE CHANCE!!!
A matter of FRAMING.
”Let’s go for a hike! Adam and Susan said they would also
go!”
”Let’s go for a hike! Adam and Susan said they would also
go, but, unfortunately, Steve cannot make it…”
A matter of FRAMING.
Influenced by CONTEXT.
 Expected Utility Theory:
Expectancy × Value
Kahneman’s examples:
Estimate
 Plan to write a textbook
on decision making
 Estimates of time needed
based on available
information on resources:
 1,5 to 2,5 yrs
Reality
 Asked a colleague about
other teams who
attempted the same
 Only 40% success rate
(others abandoned the
plan)
 The others took around
10 yrs
 Most teams’ resources
were better
Kahneman’s examples:
Estimate
 New Scottish Parliament
building – initial estimate
£40 million
 Estimates of American
homeowners of how
much kitchen
remodelling would cost:
$18,658
Reality
 Finally completed for
£431 million
 Real cost: $38,769
People tend to…
 Only consider best-case scenarios
 Disregard “statistics” on actual success rate of previous
similar attempts
Why?
 Because we do not consider unexpected events and random
disruptive factors, which are almost always present
 As specific information on them is unavailable, we do not
pay attention to them
People tend to…
 Rely on immediate examples that come to mind when
considering a situation / problem = AVAILABILITY
HEURISTIC
 Make decisions based on this immediate information
 Which information is processed influenced by context
(different cues remind us of different things)
 The cues may include attributes of the situation, of the
present alternatives, of surrounding objects, previous events,
inner states, etc.
 In addition, we seem to be “hard-wired” to pay more
attention to certain pieces of information rather than others
(information presented first, losses, beginnings and endings,
unique features, etc.) – systematic biases
What the eye doesn’t see the heart doesn’t ache for.
(Czech proverb)
 Before attempting the first quiz, watch the two
videos available in the interactive syllabus in
the IS:
Dan Ariely’s TED talk on decision making
Daniel Kahneman’s TED talk on past, present and
future selves
 Recommended good reading on behavioural
economics:
Kahneman, Daniel: Thinking, Fast and Slow.
Ariely, Dan: Predictably Irrational.
Ariely, Dan: The Upside of Irrationality.