Deviations from the normative theory Flashcards
The endowment effect
Effect of personal ownership of an item
people demand more to give up an object than they would be willing to pay to acquire it
The endowment effect - wine
A professor brought wines for prices up to 35 dollar but wouldn’t sell them for less than 100 dollars
Where is the endowment effect not seen?
Normal trading - buying shoes - if you own shoes to sell them, you have no attachment to them
Experimental demonstration of the endowment effect?
Half given a 6 dollar mug, then asked to name a selling price, half are buyers who have to bid with their own money
sellers - want double the price
this effect smaller in the UK than in the US
Probabilities
People don’t use these very well
the way it is worded, effects how they interpret it
people make decisions that aren’t equal to probabilities
What are small probabilities?
These are ignored, but if they are not they are overweighted
people are confused about the outcome
Allais paradox
This is another way where you see deviation in peoples behaviour from what utility theory believes
when gambles are combined, the probabilities of the outcomes move along the distorted value scale
Mental accounting
We allocate resources to different accounts and reason about loses and gains within particular accounts
Example of mental accounting
As you enter the theatre, you realise you have lost 10 dollers, wold you still pay 10 for a ticket?
yes - 88%
you have already paid 10 for the ticket, as you enter, you realise you have lost the ticket, would you pay for another?
yes - 46%
loss is the same, but in the second case, you have already spent that money on the ticket so don’t want to allocate more
What is a sunk cost?
Once you have spent money on something, there is nothing you can do about it
different perspectives on sunk costs
should look at inclusive accounts to have better decisions
Framing
The way you present something effects your decisions
Framing in a real context
two treatments
one month survival rate for surgery is 90%
10% mortality in first month
84% vs 50% said they would favour surgery, given the descriptions
The Asian flu problem
Choose between two programs
gains version presented in terms of lives saved - save 200 people or one third chance of saving 600 people, two thirds of saving none
losses version, terms of lives lost
400 people die, or one third of a chance that no one dies
g
gains - version a preferred
losses - version b prefered
but they are the same in two versions - people prefer the sure thing for good outcomes, but prefer the risky outcome for bad options
Joint evaluation
Judgements made in single evaluations compared with joint are not always consistent
Donations example
Donations to help dolphins vs to help farmers as skin cancer victims - on their own, same money but when together, the second case is more worthy
