College 6

Question 1

What were the rules in the Euro auction and what happened?

Answer 1

The winner would get 20 dollars and the runner up would have to pay their bet.

What happened was that you eventually keep playing for so long, the winners will pay more than 20 euro to win it because you don’t want to be the runner up. You want to minimize your losses.

Question 2

Keeping score

Answer 2

Money is a proxy for points on a scale of self-regard and achievement.

We mentally keep score of these rewards and punishments, promises and threats.

They shape our preferences and motivate our actions.

Question 3

What is the result of keeping score?

Answer 3

We refuse to cut losses, because doing so would admit failure.

We are biased against actions that could lead to regret.

We draw an illusory but sharp distinction between omission and commission, not doing and doing, action or inaction.

• Because the sense of responsibility that is attached to acting is bigger than the sense of responsibility that we have if we do nothing.
• If we do something we feel responsible for that and we feel that there is a larger chance that we regret it.

Question 4

Refusing to cut losses: Escalation of commitment

Answer 4

The phenomenon in which decision makers – after an initial decision to invest – decide to keep investing despite negative interim feedback.

• Means have been invested to achieve a certain goal.
• Despite negative feedback on its feasibility.
• It is uncertain whether the goal will be achieved.
• There are repeated opportunities to quit or continue decision making.

Question 5

Where does escalation of commitment fall on the fourfold pattern (high vs. low probability and gains vs. losses)

Answer 5

High probability and losses (reject favorable settlement).

Question 6

Which emotions are accompanied by regret?

Answer 6

By feeling that one should have known better.

By having a sinking feeling.

By thoughts about the mistake one has made and the opportunities lost.

By a tendency to kick oneself and to correct one’s mistake.

By wanting to undo the event and get a second chance.

Question 7

Impulsive shopping overseas

Answer 7

“Impulsive purchasing refers to more or less unintended, unreflective, and often immediate buying behavior on the part of an individual.”

Question 8

Upward anticipated regret

Answer 8

Focuses on comparing outcomes that would have been better than the current option.

You are contemplating buying something and you feel like buying it would lead to regret.

E.g., “What if I find this luxury bag at a cheaper price in my home country?”.

This leads to less impulsive purchase behavior.

Question 9

Downward anticipated regret

Answer 9

Focuses on comparing outcomes that would have been worse than what actually occurred.

You are contemplating not buying something and you feel like not buying it would lead to regret.

E.g., “If I don’t buy this now, during my travels abroad, I’ll never be able to find it elsewhere.”

Leads to more impulsive purchase behavior.

Question 10

With which theories can the sunk-cost fallacy be explained?

Answer 10

Alchian-Allan theorem

Avoiding waste

Thaler’s mental account theory

Question 11

Alchian-Allan theorem

Answer 11

Once an additional fixed cost is added to two products, the ratio of the price difference in the total price between two products decreases.

E.g.,
20 dollar bag vs. 50 dollar bag –> 30 dollar difference.
= 60% of 50 dollars

Already spent 100 dollars on a flight ticket…
120 dollar vs. 150 dollars total expenses –> 30 dollars difference.
= 20% of 150 dollars

Question 12

Avoiding waste

Answer 12

“Since I’m already here, I’d better buy more so as not to waste the investment on my transportation fee.”

Question 13

Thaler’s mental account theory

Answer 13

We have mental jars in our head where we keep score of income and expenses.

Past investment opens a mental account.

Utilities gained and positive experiences during travel are considered income.

Income and expenditure should balance out to close the mental account.

Question 14

What is the sunk-cost fallacy?

Answer 14

You already spent something, so it should be worth it.

Big investment (outbound travel) => sunk-cost fallacy => individuals spend more money => initial investment feels more worthwhile.

Sunk costs => downward anticipated regret

Due to waste avoidance.

Question 15

After-sale risks with impulsive shopping overseas.

Answer 15

When shopping overseas, the distance between the vendor and home increases the cost of after-sales service (e.g., impractical).

Perceived after-sale risk negatively influences impulsive shopping behavior.

Increases upward anticipated regret.

Question 16

Information confusion with impulsive shopping overseas.

Answer 16

Rational decision making requires the ability to process complete information.

Tourists may experience information overload and confusion (e.g., due to language barrier).

• Increases upward and downward anticipated regret.
  o Worry and uncertainty in decision making.

Question 17

What significant effect does after-sales risks of shopping on the trip have?

Answer 17

A negative effect on impulsive purchase on the trip.

AND

A positive effect on upward anticipated regret of shopping on the trip.

Question 18

Information confusion of shopping on the trip has a significant effect on?

Answer 18

A positive effect on upward anticipated regret of shopping on the trip.

AND

A positive effect on downward anticipated regret of shopping on the trip.

Question 19

Sunk cost of travelling has a significant effect on?

Answer 19

A positive effect on downward anticipated regret of shopping on the trip.

AND

A positive effect on impulsive purchase on the trip.

Question 20

Upward anticipated regret of shopping on the trip has a significant effect on?

Answer 20

Nothing!

It does NOT have a significant effect on impulsive purchase on the trip.

Question 21

Downward anticipated regret of shopping on the trip has a significant effect on?

Answer 21

A positive effect on impulsive purchase on the trip.

Question 22

What has the biggest positive effect on impulsive purchase on the trip? After-sales risks of shopping on the trip, information confusion of shopping on the trip or sunk cost of travelling?

Answer 22

Sunk cost of travelling. This has a positive effect on impulsive purchase on the trip and an indirect effect via downward anticipated regret of shopping on the trip.

Question 23

Which of the following statements is false?

• Sunk-cost and downward anticipated regret are related to more impulse purchases overseas.
• Sunk-cost and information confusion are related to more downward anticipated regret and, in turn, to more impulse purchases overseas.
• After-sales risk increased impulse purchases overseas.
• Upward anticipated regret did not play a role.

Answer 23

False: After-sales risk increased impulse purchases overseas.

After-sales risk reduces impulse purchases overseas.

Question 24

Is inaction the norm?

Answer 24

According to the norm theory: yes, because of the status quo bias.

Not doing anything is effortless, we don’t have to do anything, we know what the situation is so we like to do nothing.

But it depends.

Question 25

What is related to downward anticipated regret?

Answer 25

Status quo bias

Question 26

Status quo bias

Answer 26

You don’t want to change the situation because right now we know what we have and we are uncertain about what happens when we change the situation.

Question 27

Norm theory

Answer 27

Normality depends on cognitive availability of stimuli or events and possible alternatives.

• E.g., the ease by which one can retrieve similar instances and think of alternatives (“counterfactuals”).
  o If something bad happens and you start to think about what happened, the very natural instinct that we have is to think about what if I only just did this (differently). Maybe I could have prevented this negative thing from happening.
  o These counterfactuals change the norm, because next time you probably would actually do things differently to prevent another loss.
• Normality in terms of past behavior, expectations or context, and social norms.
  o Past behavior: If you didn’t act because that is the norm, and something bad happens, then of course you would act the next time.
  o Expectations or context: overseas shopping
  o Social norms: If everybody around you is buying impulsively, like on black Friday, you might join in even though you don’t need anything.

Normality holds implications for the person as it affects an array of factors, such that abnormal stimuli and events tend to stand out and elicit stronger reactions, like regret and surprise, compared to normal events.

Question 28

What theory is used in nudging?

Answer 28

The norm theory. A principle example of this is default nudges.

Question 29

How does default nudges work in organ donation?

Answer 29

The default is either that people have to opt out (there is presumed consent) or opt in (explicit consent).

Instead of people considering what they want, they often act on ease.

In countries where opting out is the default, the amount of organ donors ranges from 85.9 - 99.98%.
In countries where opting in is the default, the amount of organ donors ranges from 4.25 - 27.5%.

It is a small manipulation that has a huge effect.

Question 30

How does default nudges work in contract alternatives in a energy company?

Answer 30

There is a contract A with high service and a contract B with low service. Contract A is a little bit more expensive than contract B.

Both contracts have an optional choice for a 100% green contract.

Half of the visitors on the website will have to check the boxes themselves if they want the green choice (opt-in) and the other half had to uncheck the boxes if they didn’t want the green choice (opt-out).

For all the visitors on their website, in the opt-in condition 0.6% would buy the green contract vs 5.6% in the opt-out condition.

If you look at all the contracts sold, in the opt-in condition 7.2% bought the green contract vs 69.1% in the opt-out condition.

Question 31

What is the difference between the default nudges used with organ donors and green contracts?

Answer 31

The difference between the organ donor and the contracts, is that with the organ donor you automatically agree; you are a organ donor and you have to take action to not be an organ donor. With the contract, you have to click the button on the bottom that says you agree, so you have to acknowledge it.

The energy contracts have active acknowledgement, with organ donation there isn’t active acknowledgement. Is this ethical?

Question 32

True or false: default nudges lose their effectiveness when you are transparent about it. E.g., there is a disclaimer.

Answer 32

False.

Default nudges are also effective when transparent about nudging.

An example of a disclaimer: “This option has been checked by default because our company values sustainability, but please feel free to uncheck this option.”

Question 33

What is an evaluation within categories called?

Answer 33

Single evaluation

Question 34

What is an evaluation between categories called?

Answer 34

Joint evaluation

Question 35

Within vs. between categories

Answer 35

The emotional reactions of system 1 are much more likely to determine single evaluation.

The comparison in joint evaluation involves a more careful and effortful assessment of system 2.

Your preference can reverse based on whether it is a single (within) or joint (between) evaluation.

Question 36

What can happen with preference reversals of great art and untalented artists?

Answer 36

Effort as heuristic (default) for product quality

• “If it took a lot of effort to make, it must be good.”

Making different categories salient

• Effort vs. talent
  o “If it took a lot of effort, the artist must not have been very talented.”
   Reduced product quality

Question 37

Cho & Schwarz (2008) on effort vs. talent with paintings

Answer 37

They manipulated a text to say something about the effort, in the other condition the text was manipulated to be about the talent. In the first condition, effort is seen as good, in the second condition effort is seen as bad.

They then showed the participants a painting with some information about it. There was additional information by the painter and in the high effort condition it said that it took him more than 1 year to finish the paining, in the low effort condition it said it took him two to three days. In the control condition there wasn’t additional information about the painter.

Then they were asked for how much money they think the paining would sell at an auction.

Results:
Only significant differences from Control:

• High effort + effort theory
• Low effort + talent theory

So… interpretation of effort matters, depends on what category is salient: effort vs. talent.

Question 38

What was the second experiment by Cho & Schwarz (2008) on the talent of the painter?

Answer 38

This was a more implicit manipulation.

The first manipulation was that the participants were shown how long the painter had taken to make the paining, either a long time (high effort condition) or a short time (low effort condition).

The second manipulation was that they were asked a couple of questions, they were appointed to either the quality first condition or the talent first condition.

• Quality first: they were asked about the overall quality, then they would have to indicate the selling prize at an art auction and then they were asked about the painter’s talent.
• Talent first: they were asked about the painter’s talent, then they would have to indicate the selling prize at an art auction and then were asked about the overall quality.

The authors had the following theory:

• If the default theory is that something must be good if something took a lot of time to make. And then they were asked to rate the quality, much effort = high quality, they sell for a high prize at an auction. This gives a halo effect and people will think, well then the painter must be talented.
• But, when you first ask about talent, you activate an opposing theory. People may first think effort = good, but if you let them think about the talent of the painter, they might actually activate the intuitive theory that if people are very talented, they should not have invested a lot of talent (preference reversal).

This was the hypothesis of the authors, but they weren’t sure.

Question 39

What were the results of the second experiment by Cho & Schwarz (2008) on the talent of a painter?

Answer 39

Quality first:

• High effort…
  o Higher quality
  o Higher perceived value (no significant effect, but there is a trend in the expected direction).
  o Higher perceived talent

Talent first:

• No significant effect of effort on quality or talent. The two theories canceled each other out. Not clear whether effort influenced perceived value.

So, preferences depend on which category is activated:

• Effort vs. talent
  Can result in opposing preferences: perceived quality of art that took a lot vs. little effort to make

Question 40

How does moral decision making effect the choice how much a bank vs. a child should be compensated?

Answer 40

With single evaluation, the bank receives higher compensation than the child (possibly due to anchoring (the amount the bank lost)).

With joint evaluation, sympathy results in higher compensation for the child.

Question 41

Which surgery option do you choose?

• Surgery 1: the one-month survival rate is 89%
• Surgery 2: there is 9% mortality in the first month

Answer 41

The rational choice would be surgery 2, but emotionally people prefer surgery 1.

Framing in terms of gains (survival) vs. losses (mortality) results in inconsistent preferences.

Question 42

Implications of preference reversals

Answer 42

The beliefs we endorse when reflecting about morality (system 2) do not necessarily govern our emotional reactions (system 1).

Hence, the moral intuitions that come to mind in different situations are not internally consistent.

Inconsistency can be exploited.

Single evaluation vs. joint evaluation: one is not necessarily better than the other.

Whether single or joint evaluation is preferable depends on the situation.

Question 43

How does single vs joint evaluation present itself when looking for a guilty person?

E.g., who auctioned the 20 dollars and is guilty of the dollar auction scam?

Answer 43

When doing a single evaluation you ask yourself whether the person is guilty.

When doing a joint evaluation you ask yourself which one of the given persons is guilty. Even though, the guilty person might not even be amongst them.

Question 44

Loss-averse moral attitudes vs. efficient risk management: The taboo trade off

Answer 44

Not willing to accept a small increase in risk (e.g., save money on cheaper health insurance), even though it may free up resources for more effective risk management (e.g., buy a safe car).

Question 45

Moral licensing

Answer 45

Allowing oneself to indulge in something bad after doing something good first.

Also remember Thaler’s mental account theory: past investment opens a mental account.

Question 46

When does moral licensing happen?

Answer 46

Happens when:
1. The behavior is relatively unimportant to one’s identity.
2. The behavior is framed as progress rather than commitment to a goal.
3. Avoiding hypocrisy is of minor concern.

Question 47

Tiefenback et al. (2013) on reducing water consumption

Answer 47

Campaign to reduce water consumption. Does this have influence on energy consumption?

Conditions

• In building 1, half of the people got feedback on their consumption.
• In building 2 nobody got feedback on their consumption.
• In building 3 everybody got feedback on their consumption.

The participants that got feedback got a leaflet every week with information/tips and an insight on their own behaviour compared to others.

Question 48

What are the results from the experiment by Tiefenback et al. (2013) on water consumption?

Answer 48

• Significant reduction in water consumption during feedback period.
• Significant increase in electricity consumption during feedback period.
• Net negative energy outcome despite successful water conservation.
• If you feel good about consuming less water, they used more energy because they felt good about themselves.

Question 49

How can you reduce moral licensing?

Answer 49

By framing behavior as goal commitment vs. goal progress.

By revealing hypocrisy.

Question 50

Framing behavior as goal commitment vs. goal progress

Answer 50

Depends on focus on:

• Subordinate goal (studying)
• Superordinate goal (job market preparation)

Superordinate goal –> commitment frame –> redouble academic efforts rather than feel licensed to socialize (consistency effect).

Question 51

When is revealing hypocrisy effective?

Answer 51

When:

• People’s prior behavior is perceived as a claim about their own moral values/ identity.
• People’s prior behavior is in the same domain as the subsequent, potentially hypocritical behavior.
• Unambiguous hypocritical behavior

Question 52

What can you say about the following statement: “We experience more regret for the things we do than for things we don’t do.”

Answer 52

Depends

Question 53

What can you say about the following statement: “Being able to compare between options results in better evaluations.”

Answer 53

Depends

Question 54

What can you say about the following statement: “People always want to behave consistently.”

Answer 54

Depends