# Summary Judgment & Decision Making In Accounting

##### Course
- Judgment & Decision Making in Accounting
- Maas
- 2021 - 2022
- Universiteit van Amsterdam
- Accountancy and Control
154 Flashcards & Notes
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• ## 1 Week 1 - Normative decision making

This is a preview. There are 5 more flashcards available for chapter 1

• What are normative models?
How people should be making judgments and decisions.
• What are prescriptive models?
Practical suggestions on designing judgment and decision-making processes based on normative and descriptive models.
• System 1 and System 2 thinking has the central notion: accessibility. What is meant with that and what are the determinants of accessibility?
- How easily something comes to mind.
- Perceptions and intuitions come to mind effortlessly.

Determinants:
- Perceptual salience
- Surprisingness
- Familiarity
- When things ...
• are associated with emotion
• are associated with potential losses
• are in line with our current 'mindset'
• What does Baron (2004) state about normative models of decision making?
• Any normative model needs to start from the simple idea that some outcomes are better than others.
• No claim about absolute truth, but 'truth relative to assumptions'
• Normative models are through the 'imposition of an analytic scheme': The scheme is designed to fit the basic facts about who we are, but not necessarily to fit our intuitions.
• What is the Bayes theorem?
The theory provides a normative model for how we should update our beliefs (personal probabilities) in the presence of new information

It tells us:
P(A|B) - the probability of A given B

When we know:
P(B|A) - the probability of B given A,
P(A) - the probability of A,
P(B) and the probability of B.
• Give the normative decision making: summary
• List all possible courses of action
• Choose the one with the highest expected utility
• If new information becomes available: update your beliefs using Bayes' theorem and repeat...
• ## 2 Week 2 - How we attach value to things: the role of risk and uncertainty

This is a preview. There are 3 more flashcards available for chapter 2

• What is the Ellsberg paradox?
This is a paradox of choice in which people's decisions produce inconsistencies with subjective expected utility theory.
• How do we attach value according to risk aversion and ambiguity aversion?
• Risk aversion: valuing a sure thing higher than a risky thing, even though the expected monetary value of the two is the same.
• Prospect theory
• The certainty effect = the tendency of people to feel disproportionately better about outcomes that are certain compared to outcomes that are probable or possible.
• The possibility effect (think of the irrational decision to buy a lottery ticket): highly unlikely outcomes are given more weight than their probability justifies.
• Ambiguity aversion: we are willing to pay less for a vague choice than for a clear choice.
• Risk vs ambiguity: known vs unknown probabilities)
• How do we attach value according to loss aversion?
Loss aversion: losses weigh heavier than same size gains
• The endowment effect: we attach higher value to thing than we own than to that we do not own.
• Related phenomenon: the IKEA effect - we place disproportionate value on things that we created ourselves.
• The Zero Price effect: the difference between no cost and very small cost has a disproportionate impact.
• How do we attach value according to framing?
Framing: presenting something as a gain or a loss. More generally, the term framing is often used to describe the way in which a choice is presented.
• The Tom Sawyer effect: framing an unpleasant task as a privilege or unique opportunity.