Behavioural Economics Flashcards
(C1) Heuristics
Simple rules of thumb and mental shortcuts
(C1) Biases
Systematic errors that are a result of the use of heuristics
(C1) 3 Decision Making Perspectives
- Normative
- Descriptive
- Prescriptive
(C1) Normative
How should people make decisions?
Characteristics: rational; optimizing; forward-looking
(C1) Descriptive
How do people make decisions?
Related concepts: boundedly rational; limited cognitive capacity; heuristics or rule-based; satisficing; myopic
(C1) Prescriptive
How can we help people make better decisions?
Related concepts: debiasing; repairs; corrective measures; preventive measures
(C1) Hindsight Bias
is the inclination to see events that have already occurred as being more predictable than they were before they took place.
“I knew it all along” Effect
(C1) Perceptions/Experiences are influenced by… (2)
- Cognitive Factors: prior beliefs and expectations
2. Motivational Factors: What we want to see
(C1) Sobe (full price vs discount price) and Word puzzles test
People were sold either full price Sobe energy drink or discounted Sobe and then asked to perform word puzzles.
The people who paid full price solved more puzzles than the people who purchased for discount price.
Price discounts have a negative effect (it’s more a nocebo than placebo).
BUT this effect is eliminated when attention is drawn to the price-efficacy inferences (‘Given the price I was charged for Sobe, i feel that Sobe is _____ in improving concentration”)
AND if you set high expectations (“Sobe is proven to improve mental functioning”) then it will have positive effects
(C1) Hostile Media Effect
the finding that people with strong biases toward an issue (partisans) perceive media coverage as biased against their opinions, regardless of the reality.
Pro-Palestinian students and pro-Israeli students at Stanford University were shown the same news filmstrips pertaining to the1982 Sabra and Shatila massacre. Both sides found that these identical news clips were slanted in favor of the other side. Pro-Israeli students reported seeing more anti-Israel references and pro-Palestinian students reported seeing more anti-Palestinian references.
(C2) If asked to write down 3 reasons to buy a BMW, vs write down 10 reasons. Results?
If you write down 3 reasons you are more likely to want to buy a BMW in the next 5 years than if you write down 10.
Because coming up with 10 reasons is much harder, and it makes you think that maybe you don’t actually like BMWs because if you did then it would be easier to come up with the reasons.
(C2) Asymmetric Dominance
If you have two products, product A and product B. The introduction of a third product, B, that is asymmetrically dominated in all (or almost all) ways by one of the other options, will shift consumer behavior in what they purchase.
(C2) Compromise Effect
a consumer is more likely to choose the middle option of a selection set rather than the extreme options.
(C2) Decision Frame
The decision maker’s conception of the Acts, Outcomes and contingencies associated with a particular choice.
Decision frames are partly controlled by the norms, habits and characteristics of the decision maker
(C2) Too many options (choices)… (4)
- Increases confusion/uncertainty
- Decreases confidence
- Results in a greater tendency to “stick with the status quo”
- Can lead to people feeling regret (with non-alignable choices)
(C2) Consequences of choice complexity (4)
- deferral and non-participation
- A complex choice set may result in a smaller number of conservative choices with a view to minimize regret. A smaller choice set encourages varied and maybe aggressive/risky choices
- Relying on status quo or default option
- People use other people’s choices as a heuristic to what they should choose
(C2) Alignable vs non-alignable assortments
Alignable: a set of brands variants that differ along a single dimension (ex several bottles of ibuprofen that vary in tablet count). These require tradeoffs of a single attribute vs. price.
Non-Alignable: the brand variants vary along multiple, non-compensatory dimensions, such that while one alternave possesses one desirable feature, a 2nd alternative possesses another desirable feature (features are all or nothing). (ex. on a menu salmon vs steak). Can lead to people feeling regret.
Increasing choice sets can benefit consumers in an alignable assortment condition, but can be harmful if not aligned.
(C2) Inaction Inertia
Inaction inertia is the phenomenon that one is not likely to act on an attractive opportunity after having bypassed an even more attractive opportunity.
When an attractive opportunity is foregone, individuals tend to decline a substantially less attractive current opportunity in the same action domain, even though in absolute sense it still has positive value.
For example once a special offer is discontinued or expired, people will be less likely to complete a task associated with the foregone discount.
(C2) People are susceptible to influences from… (3)
- Questions
- Frames
- Context and peers
(C3) Expected Utility
A rational agent is indifferent to the reference point.
The individual only cares about absolute wealth, not relative wealth in any given situation. This is not what happens in reality - in reality there is prospective utility
(C3) Value Function
S-shaped and asymmetrical.
Losses hurt more than gains feel good (loss aversion)
(C3) Prospect Theory
people make decisions based on the potential value of losses and gains rather than the final outcome.
2 parts to prospect theory: Value Function and Probability Weighting Function
(C3) Prospect Utility
There are diminishing returns.
There is diminishing sensitivity.
It uses a reference point.
Losses are steeper than gains.
(C3) Samuelson paradox
as the expected value goes up the attraction of the game goes down (“50% to get $100; 50% to lose $50 vs. 50% to get $10,000; 50% to lose $5,000)
(C3) Endowment effect
you value things that you possess more than other things. Once you own something you don’t want to part with it
(C3) Loss Aversion
- Losses hurt more than gains
- Ratio of gains to losses is 2:1
- Loss aversion is often the cause for “timid decisions”
(C3) Disposition effect
The tendency of investors to sell shares whose price has increased, while keeping assets that have dropped in value.
Related to loss aversion
(C3) Probability weighting function
People tend to over-value small probabilities (many people play the lottery, a 1% chance of winning), but under-value large probabilities.
- Risk aversion is shown in the probability weighting function.
- Probability counts mostly at the two extremes
- Certainty is overvalued
- Risk seeking with losses and risk aversion for gains
(C3) Mental Accounting
Consumers allocate money (which is fungible) to mental accounts (and therefore make it non-fungible).
consumers behave differently with respect to money that is allocated to accounts vs money not allocated.
ex. You bought theatre ticket ($100) and lost it. Do you buy a new ticket? Probably not. But if you did not have a ticket and you lost $100 on the way to the theatre to buy a ticket, would you buy a ticket? Probably yes. Because the lost $100 was not allocated
(C3) Earmarking
To reserve or set aside for a particular purpose.
Money earmarked for a particular purpose is more likely to be spent on that purpose.
(C3) Refreshing Savings
If people have a savings goal of $1,000,000 and their current savings is $500,000 then they feel overwhelmed and may start spending an extra $5 here and there.
Theory suggests resetting bank statements to 0 at the end of every year, so the likeliness of saving is higher. When it’s too hard to attain then it’s demotivating
(C3) Self Herding
sometimes you use your past behaviour as evidence to how much you might like something. If you have gone in the past to starbucks and you have paid $5 then if you’ve done this in the past then it may be worth it to me.
(C3) Coherent arbitrariness
You can convince one person to accept that listening to a loud noise is worth, say, a dime, and persuade another person to take a dollar for the same unpleasant experience. Afterward, both cling to their starting values as a reference point. To listen three times as long, one listener will demand 30 cents while the other asks for $3.
(C3) Pain of paying
psychological aversion to parting with the payment, above and beyond the economic disutility and the hassle
(C3) Aversion to making payment has 3 components…
- Pain of Paying
- Hassle, effort or annoyance of executing the payment
- Disutility of money spent
(C4) Altruism
the principle or practice of concern for the welfare of others. Altruism is the opposite of selfishness.
(C4) Money Market vs Social Market
Money Market: effort will be exerted according to the reciprocity theory.
Social Market: effort will be shaped by the altruism theory and will not be sensitive to the level of payment.
Introducing monetary payments into a social exchange will cause individuals to shift from perceiving the exchange as a social market to a money market
(C4) Shadow Value of Price
A proxy value of a good, often defined by what an individual must give up to gain an extra unit of the good. The Opportunity Cost of buying something.
If you’re selling a cheaper product you should point out what else people could do with the money they are saving.
(C4) Ways to enhance opportunity cost salience (3)
- simple reminders that the money used for a focal product could be used for other purchases (‘leaving you $14.99 to use for other purchases”)
- bundling the lower priced good with a specific other product that could be purchased for the price difference (“using the $300 for CDs”)
- specifying price difference of focal comparison as a residual cash amount (“leaving you $300 in cash”)
(C4) Money & Help
If you are given lots of money vs little money vs no money (control)
Group that was given lots of money and asked to write about life with abundant finances helped the least.
Group given little money and asked to write about life with financial restrictions helped more.
Control group given no money and asked to write about their day helped the most.
(C4) People primed with money and asking for help
Participants who are primed with money take longer to ask for help when they encounter a confusing and unsolvable task
(C4) Primed with money vs not primed with money and working together
Participants who were primed with money will put more distance between them and someone they have a conversation with.
participants who are primed with money would rather work alone than work together
(C4) Thinking of money…
- Reduces helpfulness towards peers and experimenter
- Reduces amount of money donated
- Reduces asking for help
- Makes people want to be alone (play alone, work alone, sit farther away)
