3. Reference Dependent Preferences Flashcards
Describe how you can measure the endowment effect by randomly allocating goods
3 treatments
•the subject is endowed with coffee mugs and have the option to trade it for candy
•a different subject is endowed with candy and has the option of trading it for a mug
•no initial entitlement, the subject gets a choice
Endowment effect
Owning something changes it’s perceived valuation
Status quo bias
•people tend to stick with what they were randomly endowed
Why stay at status quo?
- transaction costs
- system 1 anchoring on status quo and inertia induced by that
- loss aversion (moving from status quo feels like a loss)
Real life example of status quo bias
Organ donations
•opt out countries 95%
•opt in countries 15%
Equation for effect size
(Opt out - opt in)/ standard deviation
3 channels of default effects
- endorsement
- ease
- endowment
Endorsement effect
The more decision makers believe that the default reflects a trusted recommendation, the more effective the default
Ease effect
The harder it is to switch, the more effective the default is
Endowment
The more decision makers feel that the default reflects the status quo, the more effective the default is
Framing effects
Logically equivalent choices that alter gain- loss perceptions and produce different results
How does risk seeking change when applied to a loss scenario?
People become far more risk seeking since they are loss averse
Diminished sensitivity
The marginal value of gains and losses decrease with size
Reference dependence
The carriers of value are gains and losses relative to a reference point, not final states as assumed in EUT
Prospect theory
- People transform objective values x and y into subjective values v(x) and v(y) taking reference points which define gains and losses into account
- people transform probabilities into decision weights.
