1 - Lecture Unit

Question 1

What are the internal influences on consumer behavior?

Answer 1

Consumer Perception, Learning, Memory, Product Positioning, Motivation, Personality, Emotion, Attitudes

Each of these influences plays a crucial role in shaping consumer behavior.

Question 2

What is the definition of an individual’s preferences in behavioral economics?

Preferences from an Economic Viewpoint

Answer 2

• Each individual has stable and coherent preferences.
• Individuals rationally maximize those preferences.
• An individual is assumed to maximize the expected value of a utility function, U(x).

This concept is fundamental in economic theory.

Question 3

What are the psychological findings justifying the modification of the utility functions economists employ?

Answer 3

• Reference levels, Loss Aversion and Adaptation
• Social preferences and Fair Allocations
• Reciprocity and Attribution

Question 4

What is the significance of reference levels in consumer decision making?

Answer 4

They affect the perceived utility of products or services

Reference levels can be influenced by past consumption or future expectations.

Question 5

Transferred to a purchase situation, the utility of a product or service at time t does not solely depend on its present consumption ct. What can it also depend on?

Answer 5

t may also depend on a reference level rt (determined by factors such as past consumption or expectations of future consumption).

Question 6

What is loss aversion according to Kahneman and Tversky?

Answer 6

People are more averse to losses than attracted to equivalent gains

This principle is key in understanding consumer behavior.

Question 7

What is risk aversion?

Answer 7

displeasure from monetary loss is greater than the pleasure from a same-sized gain

Question 8

When does value function changes slope?

Answer 8

The value function abruptly changes slope at the reference level (loss area: convex function; gains area: concave function).

Question 9

What is the endowment effect?

Answer 9

Overvaluing an owned item regardless of its market value.
This is especially true for items with symbolic, experiential or emotional significance.

This effect is demonstrated when individuals hesitate to sell items they own.

Question 10

When is endowment effect evident?

Answer 10

Evident when individuals are reluctant to part with a good they own for its cash equivalent.

Question 11

What can explain endowment effect?

Answer 11

Loss Aversion

Question 12

What is status quo bias?

Answer 12

Preference for the current state over changes that involve losses

This bias can lead to resistance against beneficial changes.

Question 13

What is simple altruism in the context of social preferences?

Answer 13

Individuals derive positive value from the well-being of others
- maximal benefits criterion

This concept contrasts with pure self-interest.

Question 14

What is behavioral distributive justice?

Answer 14

How individuals choose to divide resources based on perceived fairness

1. What do people, when disinterested, feel are proper rules for allocation?
2. To what degree do people sacrifice self-interest for the sake of these principles?

This area explores the principles governing resource allocation.

Question 15

What is the difference between “Maximal benefits” and “Maximin” allocation?

Answer 15

“Maximal benefits” Allocation: maximize total welfare gains

Maximin Allocation: equalize welfare gains

Question 16

What do social preferences over other people’s consumption depend on?

Answer 16

The behavior, motivations and intentions of those other people.

Question 17

What is the concept of reciprocal altruism?

Answer 17

Altruistic behavior that is contingent on others’ deservingness
* Conservation contributes to the general good.
* Social benefits of conservation diminish.

This is illustrated by conservation behaviors during resource scarcity.

Question 18

What is the difference of simple altruism from reciprocal altruism?

Answer 18

Simple Altruism
* Learning that others do not conserve cause you to intensify your conservation efforts.
→ Inconsistent with intuition and evidence!

Question 19

What is the role of volition?

Answer 19

People differentiate between those who take a generous action by choice and those who are forced to do so.

Question 20

What does interpreting other people’s motives depend on?

Answer 20

Interpreting other people’s motives depends on what we believe their beliefs about the consequence of their actions are.

Question 21

Reciprocity and Attribution: Consequences in economic context?

Answer 21

• Firms may give higher wages hoping workers will reciprocate with higher effort.
• Workers may reciprocate the volitional generosity of firms.

Question 22

What are cognitive biases?

Answer 22

Systematic patterns of deviation from norm or rationality in judgment

There are over 175 identified cognitive biases.

Question 23

How do people depart from perfect rationality?
5 biases in judgment

Answer 23

1. Anchoring and Adjustment Bias
2. Representativeness Heuristic
3. Availability Heuristic
4. The Law of Small Numbers
5. Belief Perseverance and Confirmatory Bias

Question 24

What is the anchoring and adjustment bias?

Answer 24

• Consumers perceive new information through an essentially warped lens.
• Undue emphasis on statistically arbitrary, psychologically determined anchor points

This bias affects decision-making processes.

Question 25

What is the representativeness heuristic?

Answer 25

Over-reliance on stereotypical group perceptions in judgment ## Footnote This can lead to biased decision-making.

Question 26

When does representativeness heuristic bias occur?

Answer 26

occurs when the similarity of objects/events confuses manager‘s thinking regarding the probability of an outcome - Things/events are assumed to be correlated more closely than they actually are.

Question 27

What is the availability heuristic?

Answer 27

* Over reliance on readily available information * Misjudgment of risks * Assessment based on false assumptions ## Footnote This can skew perceptions and choices.

Question 28

What is the law of small numbers?

Answer 28

Tendency to draw conclusions from small sample size People exaggerate how closely a small sample will resemble the parent population from which the sample is drawn. ## Footnote This can lead to inaccurate generalizations.

Question 29

What is the gambler's fallacy?

Answer 29

* If a fair coin has not come up tails for a while, then on the next flip it is “due” for a tails * People over-infer the probability distribution from short sequences.

Question 30

People read too much into patterns that depart from the norm, they don’t expect that further observations will look more normal. What is this called?

Answer 30

Misinterpretation of regression to the mean

Question 31

What is belief perseverance?

Answer 31

Tendency to cling to one’s beliefs even when presented with information disproving them - people ignore/are inattentive new evidence ## Footnote This bias can hinder rational decision-making.

Question 32

What are three kinds of belief perseverance?

Answer 32

1. self-impressions 2. social impressions 3. social theories

Question 33

What is confirmatory bias/ confirmation heuristic?

Answer 33

Favoring information that confirms existing beliefs Tendency to search for, interpret, favor and recall information in a way that affirms one‘s prior beliefs and hypotheses ## Footnote This bias is stronger for desired outcomes and emotionally charged issues. This can limit objective analysis.

Question 34

What happens during Polarization in belief systems?

Answer 34

Providing the same ambiguous information to people with differing initial beliefs can move their beliefs further apart. ## Footnote This effect highlights how beliefs can solidify rather than converge.

Question 35

What is Hindsight Bias?

Answer 35

The tendency for people to exaggerate how similar their beliefs were before an event to their current beliefs, often thinking they 'knew it would happen all along.' ## Footnote This can distort the perception of past predictions.

Question 36

What is Overconfidence Bias?

Answer 36

A tendency to hold a false and misleading judgment of our skills, intellect, or talent, which can be dangerous. ## Footnote This bias can lead to poor decision-making.

Question 37

What are Salient Memories?

Answer 37

Memories that are disproportionately weighed due to being memorable or vivid, even when better information is available. ## Footnote This can affect assessments in various contexts, such as crime rates.

Question 38

Fill in the blank: Errors of application can lead to _______ behavior.

Answer 38

[head-clutching] “How could I have missed that?” ## Footnote This term describes the feeling of disbelief when realizing a mistake.

Question 39

Even if people learn the relevant statistical truths of their environment, they may continue to make errors in their judgments and decision making in every single case. What does this refers to?

Answer 39

Errors of application

Question 40

Can learning and expertise eliminate biases?

Answer 40

No, even with relevant statistical truths, individuals may continue to make errors in judgment and decision-making. ## Footnote Learning can sometimes exacerbate these errors, especially in unpredictable situations.

Question 41

According to Griffin and Tversky (1992), who is often more susceptible to overconfidence?

Answer 41

Experts are often more susceptible to overconfidence than laypersons when predictability is low. ## Footnote This suggests that expertise does not always confer better judgment.

Question 42

What effect does reasoning have on predictions of behavior?

Answer 42

The act of reasoning increases subjects’ overconfidence regarding their predictions of their own behavior. ## Footnote This can lead to inflated self-assessments and poor decision-making.