Heuristics Flashcards
what are some of the problems we face when making a judgement or choice
too much or too little information, too many options, attention is limited (you’ve got other shit on), memory is limited (some things you may just forget about), in other words, max U is not possible
what are heuristics
intuition and rules (fancy word for “rule of thumb”) for allocating attention and making difficult choices
what are the three common heuristics that Tversky and Khaneman (1974) identify
Representativeness Availability Anchoring
what is representativeness (Heuristics)
subj. probability of event determined by degree to which… i) … is similar in essential characteristics to its parent population and… ii) … reflects the salient features of the process by which it is generated, similar to law of small numbers where you make assumptions based on limited information, too much attention given to congruence with stereotypes subj. probability mainly determined by resemblance. Too much attention given to congruence with stereotypes when relying on representativeness to make judgements, people are likely to judge wrongly because the fact that something is more representative does not actually make it more likely
what is availability (Heuristics)
subjective probability of an event is assessed by the ease with which instances or occurrences can be brought to mind
what is an example of availability (Heuristics)
two planes crashed last month, your friend now prefers to take the train, -> objective probability of plane crash hasn’t changed, however, event seems very realistic after crash through video, pictures -> can see yourself in situ, we overestimate probabilities of events which are easier to imagine or remember
what is anchoring (Heuristics)
tendency to rely too heavily on the first piece of information offered when making decisions
what was the paper giving an example of anchoring (Heuristics)
Tversky and Kahneman (1974), rigged wheel-of-fortune, subjects turn wheel which randomly stops at either 10/65 out of 1-100, then asked percentage of African countries in UN (≈30) -> median estimates of 25/45, used wheel as anchor, we do adjust from that point for the actual answer, problem: adjustment often insufficient
what is salience (Heuristics)
some dimensions of a choice problem may receive more/less attention than others
what is memory (Heuristics)
information may be forgotten/receive no attention if not sufficiently available
In DellaVigna (2009) what does a good’s value comprise of
V = v + o, v: visible component o: opaque component, o can be hidden cost (<0) or hidden feature (>0)
what is the difference between the maximisation of a good’s value (V = v + o) for a rational or behavioural consumer (from DellaVigna (2009))
rational consumer maximises actual value V, behavioural consumer maximises perceived value V ̂instead (vhat)
what is memory and salience in relation to the maximisation of a good’s value (V = v + o) for a rational or behavioural consumer (from DellaVigna (2009))
Memory: consumer may not remember opaque component o, Salience: o may not get full attention, capture both scenarios with “degree of inattention” θ(s,N): 0>θ>1 with θ=0 as standard case, s: salience of o N: (weighted) number of competing stimuli (message on phone for example, weighted as say partner splitting up will have more weight)
what is the equation for the perceived value in the full model for the maximisation of a good’s value from DellaVigna (2009)
V^ = v + (1-θ)o θ: “degree of inattention” - θ(s,N). ∂V^/∂s>0 since ∂V^/∂θ<0 and ∂θ/∂s<0. ∂V^/∂N<0 since ∂V^/∂θ<0 and ∂θ/∂N>0
how do you express consumer demand in relation to perceived value V^
consumer demand D[V^], with dD[V^]/dV^>0, hence demand weakly increases (decreases) in hidden quality (cost), Demand weakly D[V^] increases in s Demand weakly D[V^] decreases in θ and N
In US retail, where taxes don’t have to be featured on the price tag, how would you put them in to the perceived value equation (V^ = v + (1-θ)o v: visible component o: opaque component, o can be hidden cost (<0) or hidden feature (>0))
Taxes tp therefore like a hidden cost o with ∂V^/∂(tp)<0 Perceived value -> V^=v-(1-θ)tp
which paper analysed the effect of taxes in US
Chetty et al. (2009) - inattention to taxes
what is the setting of field experiment on effect of taxes (Heuristics)
Chetty et al. (2009) use scanner data from grocery store, Treatment: put price tags explicitly stating also after-tax price, for a few products over 3 weeks. Identification strategy compare sales to… -Avg. pre-treatment sales for same item -sales for other items not -showing after-tax price, sales in control stores
results of experiment on effect of taxes (Heuristics)
Chetty et al. (2009)
Treated categories: reduced by 1.3, (mean quantity sold)
Diff in diff: 2.14 (control was increase by 0.84) reduction in items sold (significant)
Triple difference: -2.20
(DDts=-2.14, DDcs=0.06, DDD=-2.20)
(DDcs is diff in diff between control and treatment products in the control store where there was no treatment to any products)
motivation behind paper on the inattention to right-digits
Lacetera et al. (2012) general bias: more attention given to left-digits -> £x.99 pricing
setting of paper on the inattention to right-digits
Lacetera et al. (2012), look at used-car sales, where mileometer very important determinant of value, perceived value of used car: V^=K-αm^, with m^=floor(m,10000) + (1-θ)mod(m,10000), eg for m=69999 -> m^ = 60000+(1-θ)9999, this predicts jumps in V^ at 10k discontinuities of -αθ10000 while slope is -α(1-θ), buyer pays full attention to complete 10000 but don’t sufficiently factor in between
what is the data on paper on inattention to right-digits
Lacetera et al. (2012), 27m wholesale used car auctions, Buyer: used car dealer Seller: car dealer Continuous mileage displayed prominently on auction floor Results: data resembles predicted jumps very well, Sizeable magnitudes: $200
how does menu effects fit into heuristics
scenario until now: pick one option from finite set of options, what if set too large? -> evaluate on single criterion, if we have to decide on shares/percentages -> allocation rule, leads to other, more specific heuristics, than ones encountered before
what is choice avoidance (Heuristics)
Heuristic: Refusal to choose with choice overload
