Chapter 9 Flashcards
Rational Behavior
Objective and in accordance with reason and logic
Psychological bias
psychological factors affect our decision making
Irrational Behavior
Subjective and emotional
Predictably irrational
our errors as humans are systematic and reliable
Thinking fast (system 1)
Decision making that operates quickly with little effort and less control
ie. daily processes
Thinking slow (system 2)
Decision making that operates more slowly with more effort and deliberate control
-idling in the background until it needs to resolve what system 1 can’t
Anchoring
Different starting points or initial values produce different estimates or decisions ie.
87654….1 people more likely to estimate larger end number
vs.
12345….8
-Even if you are aware of anchoring you can still suffer from the bias
Decoy effect
using a more or less expensive item as an anchor to stimulate the sale of a target item
ie. a cheaper wine to sell more of an expensive wine
ie. a more expensive item to sell more of a less expensive appliance
Law of sample size
Small sample sizes have more variance
Base Rate Frequencies/prior probabilities
How often an event or situation actually occurs
Representativeness Heuristic
Used to estimate the likelihood of an event based on how closely it matches or represents related examples or stereotypes in mind
- often ignore base-rate probabilities when given more descriptive information ie. Linda
Availability Heuristic/bias
Estimating the frequency of an event based on how easily examples come to mind
ie. estimate more shark attacks than skin cancer; shark attacks receive more media coverage
Recognition Heuristic
selecting the most recognizable item in a set
ie. in guessing which Italian city is most populated: likely to select city that you recognize
Fluency heuristic
assign higher value to option that is recognized fire/more quickly/easily
One-clever-cue heuristic
Making a decision based on a single cue ie. price, closest location
Take the best cue heuristic
Making a decision based on considering each cue in a sequential order
ie. start with all phone under $200, then best battery life, then color, etc.
Conjunction Fallacy
False assumption that a combination of conditions is more likely than either condition by itself
ie. Linda is more likely to be a bank teller and a feminist based off her description than just a bank teller
Gambler’s Fallacy
Faulty reasoning that past events in a sequence affect the likelihood of future events
ie. keep getting heads when flipping a coin and think that the next flip is more likely to be a tail
Hot Hand Effect
Perception of being “on a roll”
ie. gambling or keep making basketball shots
-people seek patterns even when none exist, inferring causes to explain random events
Deliberation-without-attention effect
Consciously make a decision but unconscious processes help you come to it
ie. sleeping on it
Less-is-more effect
Too much deliberation devoted to a problem leads to less accurate, sensible, or satisfying decisions
The endowment effect
We tend to give higher values to items we own
-ie. would sell items for more money than if you were to buy it
-explained in terms of loss aversion
Loss aversion
We would rather not get a benefit than risk losing something we already have
ie. keeping on old computer as a backup when you could sell it and get money
Status Quo bias
preference for the current state of affairs
Transaction Costs
timer, effort, and resources needed for change
ie. have to clear computer, post ad, and meet up in order to sell it
Optimal defaults
Automatically placing people into options that have the greatest benefits
ie. employer automatically contributes a portion of employe’s paycheck to 401K and matches it after they have worked there for 1 year - but they can opt out of they want
ie. automatically placed as organ donor but can opt out
Sunk Cost Effect
Tendency to continue a task once investing time, energy, and resources
-resistence to change or attachment to money or time invested makes people actually lose more by continuing
Risk Aversion Strategy
Used when problem is stated in terms of gains; people are less likely to choose a riskier option than an option but definite gain
ie. you will for sure save 2000 people-more likely to choose this option
Prospect Theory
When evaluating gains, people are risk aversive; they would rather take a sure gain than a risky option for slightly more money
When faces with sure loss: people become risk seeking; they are willing to lose more if it allows them a small chance of avoiding any loss
Risk Taking Strategy
Used when problem is stated in terms of losses; people are more likely to choose a riskier option than an option with definite loss
ie. 2000 people will for sure die; more likely to choose riskier option with chance for some people to survive
The Framing Effect
Framing a choice within a positive (ie. saving patients) vs a negative (leaving patients to die) alters the evaluation process
-people tend to favor riskier options with more variation under negative scenarios
Utility
the satisfaction and subjective reward obtained from making a decision
Positive Utility
Gains from a decision
Negative Utility
Losses or costs from a decision
Expected Value
The lucrativeness (profit) of an option; valueprobability
ie.
option a: 5% chance of winning $1000; expected value = $50 (.051000=50)
option b: 95% chance of earning $100; expected value = $95 (.95*100=95)
Rational Choice Theory/Classic economic theory
We make decisions based on the expected value of our options; should choose options with higher utility
Descriptive Theories
How we actually make decisions based on beliefs and preferences and not how things “should be” as described in rational choice and normative theories
zero price effect
enticement of free option or item
Neuromarketing
Using brain scanning to predict product preferences
ie. while watching an ad, EEG can provide an ongoing measure of when people tune in or out
