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1) List and briefly explain what you consider to be the two most important concepts related to decision

making that you learned from reading Predictably Irrational


Concept 1: The Cost of Zero Why We Often Pay too Much When We Pay Nothing
Humans are not risk-adverse, they are loss-averse. When considering a normal purchase, loss-aversion
comes into play. When given a choice between two similar products, one costing money, and one being
offered for free, people forget to consider the downsides of the item that is offered for free. When an item is
offered for free, there is no immediate visibility of loss. The concept of getting something for free makes us
perceive that item that is being offered for free is immensely more valuable than it really is.

Concept 2: The High Price of Ownership Why We Overvalue What We Have


According to the “endowment effect,” people who own something begin to value it more than other people
do. The three fundamental quirks of human nature when it comes to ownership are:
> People fall in love with what they already have
> People are loss-adverse and ten to focus on what they might lose, rather than what they might gain.
> People assume that other people will view the transaction from the same perspective as we do.
Because of the “endowment effect,” people also tend to value things they put more work into. One way to
counteract the “endowment effect” is to try to view all transactions as a non-owner.

2) Why, for important decisions, is it advisable to always have more than one alternative from which to
choose?

3) Briefly describe the meaning of each of the four levels of measurement (nominal, ordinal, interval, and
ratio) and their relationship to one another, as well as limitations for their use in mathematical operations.
Nominal Measurement- This is the lowest level in terms of measurement. Nominal data are numerical
representations for names. Nominal information is used for identification purposes only and implies nothing
about the ordering. Examples of nominal figures are phone numbers and social security numbers. You
cannot perform mathematical operations on this data.
Ordinal Measurement- This is the third highest level of measurement. Ordinal measurement implies an
order or ranking among elements. The order can be either increasing or decreasing depending on the
application. An example of ordinal measurement: The Dodgers baseball team being ranked number 1 in the
National League West, and the Giant’s being ranked last (5th place) in the National League West. We
cannot add or multiply ordinal data because the rankings only take into account ordering among the
elements and nothing more.
Interval Measurement- This is the second highest level of measurement. Interval scale data possesses
the meaning of nominal and ordinal data, however, it also has meaning about the interval between objects.
Intervals on different parts of an interval scale have the same meaning. Interval data can be used in
mathematical operations such as addition and multiplication. However, you cannot infer that a total of 10 is
twice as good as a total of 5, you cannot multiply interval level number by another interval level number.
Ratio Measurement- This is the highest level of measurement. Ratio data possesses the meaning of
nominal, ordinal, and interval properties, in addition to the property of ratios. Corresponding rations on
different parts of the ratio scale have the same meaning. In ratio scale measurement equivalent ratios are
considered equal. There are no mathematical restrictions when using ratio level data.

4) Why is a hierarchy of objectives superior to a linear list such as is typical in columns of a spreadsheet for
methods such as weights and scores. A hierarchy of objectives allows a decision maker to keep track of
what is most important to them. It organizes the objectives into different levels of a hierarchy tree which
allow the decision maker remain focused on the objectives.

5) Explain how ratio scale priorities can be derived for qualitative objectives.

6) In your own words, describe and give examples of absolute measurement and relative measurement.
What is the primary advantage of relative measurement?
Absolute measurement refers to something that you can measure with known amounts such as standard
units.
Examples of absolute measurement:
 Standing on a scale to measure body weight
 Measuring out 1 cup of flour for a cake recipe
 A police officer using a radar gun to measure how many miles per hour you are driving
Relative measurement refers to the act of measuring something compared to another thing or estimating
things proportionally to one another.
Examples of relative measurement:
 Knowing that store A is a further distance than store B.
 Knowing that the sun is closer than the other stars in the sky
 Knowing that apples and oranges are about the same size.
The primary advantage of relative advantage of relative measurement is the fact that it allows one to take
into account intuition and qualitative factors.
7) Discuss the importance of iteration when making important decisions. What should you consider when
iterating because the model results do not agree with one or more people's intuition? Iteration is necessary
when making important decisions because you will find that both your model and intuition may change
during the experiment. Iteration allows the decision maker to develop an understanding of tradeoffs among
objectives and an understanding of the implicit and explicit objectives of the experiment. Iteration also
allows the decision maker to gather additional information to father clarify objectives, and alternatives.
Intuition is important in the decision-making process because it keeps in account qualitative aspects of the
problem.

8) Explain why and how it IS possible to compare apples and oranges.


The nature of relative measurement shows how people tend to compare things with one another, things
that are easy to compare when thinking fast. People tend to avoid comparing things that cannot be
compared easily. It is easy to compare an apple and an orange because 1) both items are fruit, 2) both
items are similar in size.

9) State the three original axioms of AHP and comment on the reasonableness and implications of each. In
addition, we naturally use absolute measurement to gauge alternatives against an established scale such
as weight. We can also use absolute measurement to compare the apple against the orange in terms of
weight.