Final Exam Flashcards
What is Adaptation
People underestimate the extend to which they adapt to changes in their circumstances. People tend to be relatively accurate when predicting short-term impacts but not long-term impacts
What is Bayee’s Rule
Probability [hIi] = number of ways i and can be true / number of ways i can be true overall
Basically based on drawing with replacement
What are heuristics?
A judgement heuristic is an informal algorithm (like a set of rules) which generates an approximate answer to a problem. These heuristics allow one to speed up the process of finding an answer. However, they occasionally produce an incorrect answer—which we will call a bias.
What are the 3 main heuristics?
Representativeness heuristic
Availability heuristic
Anchoring heuristic.
What is representtiveness heuristics?
Decision makers use similarity—or representativeness—as a proxy for probability judgment.
People form a mental picture of the event and then compare that picture to the question with more similarity being judged as a higher probability.
What is conjection bias?
People sometimes judge the probability that two events can happen higher than the probability that just one of those events can happen.
Violated the conjunction rule of statistics which states that the probability that two events both happen can never be higher than the probability of only one of those events occurring
What is the gamberlers’ fallacy
false belief that in a sequence of independent draws from a distribution, an outcome that has not occurred for awhile is more likely to come up in the next draw.
Drawn without replacement
What is the representativeness relation to random sequences
representativeness means that people will judge the probability that an observed sequence of outcomes was generated by a given statistical process by the similarity between the sequence and what is considered a typical sequence generated by that process.
What is the hot-hand fallacy
Given the gambler’s fallacy, people do not expect to see many successful shots in a row. But once they observe a string of successful shots—which does not appear to be representative of a random process according to the player’s average performance—they conclude that the player is ‘on fire’.
Belief that performance varies systematically over short periods. Assume distribution based on observations
What is the avilability heuristic?
People assess the probability of an event by the ease with which instances or occurrences can be brought to mind. The easier they can recall an event, the more likely they perceive it to happen, influenced rehearsed experiences, familiarity and how personal it is.
Is NHD a form or misprediction
Yes, people tend to think they have more control than they really do
What is projection bias?
People underestimate changes in preferences, projecting their current preferences onto future decisions.
How does Projection Bias explain the Endowment Effect
Sellers feel bad about losing a mug for one period but think that this will last forever. They correctly predict what its like to have a mug and so values the mug more than sellers without PB.
Buyers feel goof about getting a mug which will last for one period but they believe this will last forever.
Therefore, PB leads to overvaluation of reference dependent durable goods relative to non-RD non-durable goods.
How does prediction bias explain addiction?
Unaddicted person may think experimenting is ok but doesn’t want to become addiction and projects her current non-addicted preferences and believes she’ll stop. So tries despite not wanting to start if she’ll get addicted
How does projection bias explain quitting attempts?
If you consumer regularly but in a low craving sate, your project this forward and believes hey can quit. But when cravings intensify, it becomes difficult.
Short-abstention not explained by HPD as wouldn’t put yourself through the pain of withdrawal for longer-term gain.
How is Projection Bias related to other biases
1) Hindsight bias: if you learn something you believe you’ve always known it
2) Curse of knowledge: can’t appreciate what its like not to know something
3) False consensus effect
What is the Base Rate Neglect Fallacy
Bayes rule depends on one’s initial beleif regarding the probability that the hypothesis is true, however, people are often insensitive to the base rate (for example, the HIV problem whereby people make the judgement based on the probability of the test being accurate rather than the probability of having HIV in the first place)
Don’t sufficiently account for the overall frequency of an event in a population
Was does microeconomics assume about people’s preferences
People have a well-defined set of preferences that they have perfect knowledge of. However, not true - we recall and reconstruct preferences ad hoc and preferences are often influenced by context and factors that should be irrelevant
What are 2 factors that influence our preferences?
1) Context - environmental factors influence our preferences
2) Reconstructed Memories - we incorrectly recall past experiences and evaluate them according to some salient point rather than as a global experience
What is Narrow Bracketing?
We make decisions case by case with a narrow view of overall goals and break our life into managable peices
The lack of full integration of our decisions with other decisions and outcomes can undermine utility
What are 3 Context Effects?
1) Compromise Effect
2) Asymmetric Dominance
3) Default Option Effect
What is the Compromise Effect?
When people are unsure about what they want and have to tradeoff between qualities, they chose the safe or middle option
What is Asymmetric Dominance?
When making conflicting choices, people look for a reason to choose one option over another and so adding an alternative that is clearly worse than other will induce people to chose than option.
What is the Default Effect?
When people are overloaded with choice, they find it difficult and chose no option or the safest option
