Cognitive biases

Question 1

Bias definition

Answer 1

Cognitive biases are systematic patterns of deviation from norm and/or rationality in judgement

Question 2

Endowment effect

Answer 2

This occurs when we overvalue something that we own regardless of its objective market value

Question 3

Present Bias

Answer 3

The tendency of people to give stronger weight to payoffs that are closer to the present time when considering trade-offs between future moments

Question 4

Present bias example

Answer 4

Present biases person may prefer to receive ten dollars today over receiving 15 dollars tomorrow, but wouldn’t mind waiting an extra day if the choice were for the same amounts 1 year from today versus 1 year and 1 day from today

Question 5

Status-Quo bias

Answer 5

When people prefer things to stay the same by doing nothing (inertia) or by sticking with a decision made previously

Question 6

Prospect Theory

Answer 6

• Shows how people decide between alternatives that involve risk and uncertainty
• Demonstrates that people think in terms of expected utility relative to a reference point rather than absolute outcomes
• Developed by framing risky choices and indicates that people are loss-averse, since individuals dislike losses more than equivalent gains

Question 7

Loss Aversion

Answer 7

• ‘Losses loom larger than gains’
• the pain of losing is psychologically twice as powerful as the pleasure of gaining
  -Explains the endowment effect and sunk cost fallacy
• Penalty frames are more effective than reward frames in motivating people and has been applied in behaviour change strategies

Question 8

Dynamic inconsistency

Answer 8

• A situation in which a decision-maker’s preferences change over time in such a way that a preference can become inconsistent at another point in time
• Many different ‘selves’ within decision makers, representing different points in time

Question 9

Sunk cost fallacy

Answer 9

• When individuals continue a behaviour or endeavour as a result of previously invested resources - resulting from ongoing commitment
• e.g. individuals ordering too much food and over-eating, just to get their money’s worth

Question 10

Herd Behaviour

Answer 10

-People do what others are doing instead of using their own information or making independent decisions