Decisional anomalies Flashcards
According to full rationality, decision-makers have unlimited computational power, willpower and they are selfish
True
Substantial rationality is a reduced form of perfect rationality so that an agent is able to control and evaluate the whole set of alternatives. They have unlimited computational power in determining the order of preferences and in maximizing utility
True
Procedural rationality is a reduced form of perfect rationality so that an agent is able to control and evaluate the whole set of alternatives. They have unlimited computational power in determining the order of preferences and in maximizing utility
False
Procedural rationality and bounded rationality are synonym
True
The axiom of ??? under SEM is that given two alternatives A and B, it must be that A > (=prefered) B or B > A or A = (=similar to) B
Completeness
The axiom of ??? under SEM is that given three alternatives A, B and C, if A > B and B > C, then A > C
transitivity
The axiom of ??? under SEM is that any alternative is at least as good as itself
Reflexivity
The axiom of ???? under SEM is that given two different alternatives A and B, if A is revealed directly/indirectly preferred to B, then B cannot be revealed directly/indirectly preferred to A
Revealed preferences
The axiom of ??? under SEM is that given A+x >B+x, then A > B
Cancellation
The axiom of ??? under SEM is that given two alternatives A and B, if A is better than B in at least one state and at least as good as B in all other states, then A is dominant over B
Dominance
The axiom of ??? under SEM is that there is invariance with respect to endowment, irrelevant alternatives, and elicitation procedure
Invariance
Imagine this sequence of colour
Black 100%
Grey 99%
Grey 98%
Grey 97%
Grey 96%
Grey 95%
…
Grey 1%
White 100%
We concatenate this sequence with the similarity operator (tilde), so that Black 100% is similar to White 100%.
This is an example of the failure of which axioms?
Transitivity
The endowment effect is an example of reference dependency, which is an anomaly under SEM
True
The anchoring effect is an example of reference dependency, which is an anomaly under SEM
True
Context effect
loss aversion
endowment effect
anchoring
diminishing sensitivity
are examples of a kind of anomaly, which one?
Reference dependence
Diminishing sensitivity means that the presence of other alternatives in the choice set affects the choice
False, this is the context effect.
Diminishing sensitivity means that losses have a higher impact than gains
False, this is the loss aversion
Diminishing sensitivity means that the impact of a change decreases with distance from a reference point
True
Often real estate agents use the context effect (asymmetric dominance)
True pg 12
Imagine you have a set of three cameras
A —> high quality, high price
B —> low quality, low price
People choose between A and B
After the decision, option A+ is reveal
A + —-> even higher quality, higher price
Under SEM, it is ok to switch from A to A+
True
Imagine you have a set of three cameras
A —> high quality, high price
B —> low quality, low price
People choose between A and B
After the decision, option A+ is reveal
A + —-> even higher quality, higher price
Under SEM, it is ok to switch from B to A
False
Imagine you have a set of three cameras
A —> high quality, high price
B —> low quality, low price
People choose between A and B
After the decision, option A+ is reveal
A + —-> even higher quality, higher price
Some people decide to switch from B to A, which violates SEM conditions.
This is an example of which anomaly?
Context effect/Reference dependency/ Asymmetric Dominance
We have two options for an orange juice
A is high in price but low in added sugar
B is lower in price but high in added sugar
A2 is revealed and it’s similar to A
People are more oriented towards B
This is an example of which anomaly?
Reference dependency/Context effect/ SIMILARITY EFFECT
Imagine a shop that sells two goods, A and B.
Choosing between them is difficult.
Then we add C
After that some people switch from A to B
This is an example of what effect?
Extremeness aversion
The two cameras experiment by Kahneman and Tversky is an example that shows what effect?
Extremeness aversion
People give more value to possessed goods instead of others’ goods.
This is the…
Endowment effect
An income raise from 1000 to 1100 is higher satisfying that an income raise from 2000 to 2100. This is an example of …
Diminishing sensitivity
Imagine you sell two goods, A and B.
A > B
A is sold for 15 cents
B for one cent
The company decides to lower both prices of one cent.
Some people switch from A to B.
This is the failure of ….
Cancellation axiom
Imagine two bets
X = 4, P = 0.88
X = 40, P = 0.11
The majority of people choose the former, but if you ask them to set a price for each of them, they say that the latter should be more expensive.
This is the …
Failure of procedural invariance/
preference reversal phenomenon
28
Equivalent descriptions lead to different choices by altering the presentation without changing the information. This is the…
Framing effect
29
People prefer a treatment that has an 80% chance of success to a treatment that has a 20% of success. This is due to the …
Framing effect
Given a positive frame, people choose the risky option
False, 32
Given a negative frame, people choose the sure option
False, 32
Opt-in and Opt-out are particular kind of framing effect
True, 33
If the policy-maker opts for an opt-out policy for organ donation, more organs are donated. This is due to the…
Framing effect/
default option
33
Failure of invariance and and dominance has been observed
True
Imagine you sell a gift package A of one good.
You ask a person to formulate another gift package B of two goods: cash and the former good so that the two gift packages are equivalent.
Some people will prefer cash while some people will prefer the good.
Then you tell people to decide what package they do prefer.
We should expect a 50-50 distribution, in contrast, we observe that people tend to choose the gift that exacerbates the good they prefer
This is a failure of SEM axioms and assumptions
True
People focus on positive aspects when awarding, while they focus on negative aspects when denying
True, 42
When it is hard to rationalize their choice, people avoid searching for additional options
False, 43
When the choice is not easy, people prefer to wait
True, 44
