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
What is Coherent Arbitrariness
Even though preferences are influenced by irrelevant cues (arbitrary), people still know that they should pay more for a larger quantity / better quality (coherent)
What is the Duration Neglect Effect?
People often judge an experience by average utility over the experience rather than the duration of it so a short lived but very painful event is worse than a less painful but drawn out event.
What is the Overweighting the Peak Effect?
People sometimes evaluate an event based on its best or worst moments and neglect the rest
What is the Overweighting the End Effect?
People tend to evaluate an event based on its last few mments
What is Mental Accounting?
People separate their money into different mental accounts for different purposes to better organise themselves.
Sending too much from one budget feels bad and accounts are not fully integrated
How can Mental Accounting hep mitigate some of the issues from Narrow Bracketing?
People brackets a decision if they fail to take into account that the decision has broader consequences while mental accounting forces people to integrate it with other relevant decisions from the same accounts.
Can also make comparisons easier (how much you spend on the movie considered within entertainment budget and what other entertainment you could buy)
What is Incomplete Debiasing?
If someone is told something is true and this leads them to draw a certain conclusion, even finding out that it was not true doesn’t eliminate the conclusion
What if Confirmatory Bias?
People selectively ignore or misread information to support their hypothesis.
What are Distributional Preferences?
Preferences can be represented in terms of the amount of money or material resources people receive (their own and others)
People tend to give in dictator games
What do p and b represent in distributional preferences
People weight others’ outcomes by p when ahead or b when behind. Negative b implies that they are willing to hurt to reduce the inequality.
p is the willingness to sacrifice to help other
What is the impact of costly exit in dictator games?
Distributional would suggest no effect but people are willing to take the penalty to avoid playing the game so they can keep the remainder
Allows them to act selfishly while alleviating face saving concerns
What is the impact of having random choice in dictator games
People tend to hide between the possibility of a forced choice in order to give themselves the highest expected payoff without being judged harshly for it
What are Face Saving Concerns?
Motivation to avoid unfavourable judgments - from others or themselves. People also care about whether they are shielded from the judgement
What is the impact of moral wiggle room
Makes people less generous as they can justify their actions to themselves when the impact on the other person is unclear - can save face in front of themselves
What supports reciprocity?
People care about how distributions arise.
People reject low offers in ultimatum game and more reject when they know that the person has chosen this distribution when there were more fair outcomes available
What are Intentions Based Preferences?
People make systematically difference choices from the same distributional alternatives in order to reciprocate the opponent’s reaction.
There are material and psychological factors in that people care about material payoffs and others’ intention
What is Rabin’s Model of Fairness?
Underpinned by reciprocity - people care about material payoffs and psychological payoffs based on perceptions of fairness. Tend to reciprocate actions (nice if other is nice)
What is a fairness equilibrium?
When actions (mean, nice or neutral) are reciprocated
When do Irrationals have a large impact on the outcome?
Synergistc effects like deciding which party to go to (benefit based on how many others are going to it)
When do irrationals have a small impact on the outcome?
Congestion effect like commuters trying to decide which way to go - rationals counterbalance
What is an example of irrationals faring well
Auction in which there is a cost to enter and the winner pays 0 if there is only one bid.
Dominant is to play own valuation but if one is crazy and always bids high, the other will drop out and the crazy one win and pays nothing
What is the classical argument for excluding irrational players?
They would fare badly relative to rationals, lose their wealth and be eliminated from the market. However, irrationals can do better in some situations and the presence of even a few can have a large impact n the outcome
What is level K thinking?
Assume that everyone else is the level below you and act accordingly
What is level 0 thinking
Random
What is level 1 thingking
Assume all others are random and act accordingly
What is level 2 thinking
Assume all other are level 1 thinkers and act accordingly
What explains the bunching at 33 and 23 in the Beauty contest?
Level K thinking
Level 0: pick 50
Level 1: assume others pick 50 and pick 2/3 50 = 33
Level 2: assume others pick 33 and pick 22
What is the Cognitive Hierarchy Model?
Generalisation of level k model but level k assumes others are distributed among the lower levels rather than all being the level immediately below
What is dominance thinking?
on-equilibrium form based on iterative deletion:
1) assume others play uniformly
2) assume others have done this as well
What is Choice Reinforcement?
Strategies are reinforced by realised payoffs and attraction to the unchosen options doesn’t change or only changes mechanically.
What is Belief Learning?
People update their beliefs about what others will do based on history and attraction to strategies that will do well increases. Can weight all past observations equally (fictitious) or more recent ones more (Cournot)
What is Experience Weighted Learning?
Players adjust their attraction to different options in each period but the weight on forgone payoffs is smaller than actual payoffs
What re 3 Learning Approaches
1) Choice Reinforcement
2) Belief Learning
3) Experience Weighted Learning
What is Information Projection?
People tend to act as if the information they have is available in other situations and to other people - project their information onto past selves and others
What 4 biases contribute to Information Projection?
1) Hindsight Bias
2) Curse of Knowledge
3) Illusion of Transparency
4) False Consensus Effect
What is Hindsight Bias
When one receives information and is then asked what they believed before, they tend to underestimate the importance of the new information in shaping their beliefs (e.g. one you know the picture you see it earlier)
What is the Curse of Knowledge?
Those who know something can’t predict or understand the behaviour of those who don’t - project own knowledge onto them
What is the Illusion of Transparency?
People overestimate the extent to which their internal states are transparent to others and believe lies are more easily detected than they are
What is the False Consensus Effect?
People overestimate the extent to which other’s characteristics coincide with their own
