Key Terms Flashcards
1
Q
What are the influences on decisions in markets?
A
- Economic expectations: conjectures about future economic events, based on three sources:
a) Past experiences
b) Learning processes
c) Knowledge and opinion about new circumstances - Consumer sentiment, “Consumer Climate”: Consumers’ expectations and intended actions Consumer sentiment and economic context
2
Q
Which Consumer Sentiment Indices are there?
A
- Univesity of Michigan Consumer Sentiment Index: measures consumers’ subjective feelings about their indivdidual financial situation and overall economic conditions at present and in the future
- EU Consumer Sentiment Index: scores the consumers’ subjective views
- Conference board index
3
Q
What is the profit maximisation principle?
A
Maximum result possible with the given quantity of resources
4
Q
What is the cost minimisation principle?
A
Given result with minimum of resources
5
Q
What are the axioms of preferences?
A
Basic assumptions about preferences that form the core of the rationality assumption
a) Completeness (A≥B; A≤B; A≈B)
actors can rank alternatives into a preference order
b) Transitivity (if A≥B and B≥C, then A≥C)
consistent preference order over alternatives
c) Reflexivity (A≈A)
every bundle of alternatives is just as good as itself
d) Non-satiation
actors prefer to possess more of a good and not less
e) Continuity
loss of a specific quantity of Good A can be compensated with receiving a specific quantity of another Good B
f) Convexity
actors possessing a small amount of Good A and a large amount of Good B will only be indifferent to the loss of part of A if they receive a proportionally larger quantity of B in return
6
Q
What is homo economicus?
A
- Basic assumptions in economics: utility maximisation and rationality
- Homo economicus: paradigm of a utility-maximising and rationally behaving actor
• (neo-)classical economics
• Adopted by some psychological theories
7
Q
What are psychological theories based on homo economicus?
A
- Exchange theories: relationships as exchange of material and immaterial resources
- Theses on social interaction (Nye, 1979)
• People making rational decisions
• People act and react in social interactions
• Benefits with some costs
• Behavioural patterns that have been rewarded in the past are repeated
• If no behavioural alternative promises a profit, people will attempt to hold costs as low as possible
• People are satisfied in their interactions when they get what they think they deserve
• Social contact is based on the norm of reciprocity
8
Q
What are challenges to homo economicus?
A
Core question whether people actually want and are able to pursue their goals in the best possible, economically rational ways
9
Q
What is economic psychology?
A
“Economical Psychology studies the psychological mechanisms and processes that underlie consumption and other economic behaviour. […]”
10
Q
What is financial psychology?
A
- Studies experience and behaviour when dealing with money or highly liquid investments
11
Q
What are similarities and differences between economic and financial psychology?
A
- Economics and psychology: similar interests, but also differences
• Approach: fundamental assumptions (prediction) vs inductive (theory)
• Methods: mathematical models vs statistical inference
• Data: aggregate and objective data vs observational and subjective data - Experiments
• Both in behavioural economics and economic psychology
• Differences in focus on learning, non-deception, financial incentives
12
Q
What are decisions under certainty?
A
- Decisions where no probabilities are involved regarding the consequences of alternatives
- Decision-makers possess complete information about all possible alternatives and certainty about their consequences
13
Q
What are decisions under uncertainty?
A
- Decisions where the consequences of alternatives do only occur with some probability
- Risky decisions: probabilities of consequences of alternatives are known
- Ambiguous decisions: probabilities of consequences of alternatives are only vaguely known
14
Q
Which effects happen when it comes to preferences over decision types?
A
- Decisions under certainty to decisions under uncertainty
- Risky decisions to ambiguous decisions
• Ambiguity effect: decision-makers prefer risky decisions to ambiguous decisions
• Ellsberg paradox: decision-makers behave inconsistently between two formulations of the decision situation that have mathematically identical possible gains but differ in ambiguity. Demonstrates the ambiguity effect
15
Q
What is the St. Petersburg paradox?
A
- Expected value theory
• Expected value = sum of products of probability and payoff
• Choose option with highest expected value
• St. Petersburg paradox illustrates that decision-makers do not base decisions on expected value
16
Q
What is the Subjective expected utility theory?
A
- Subjective expected utility = sum of products of subjective probabilities and subjective utility of consequences
- Choose option with highest subjective expected utility
17
Q
Which decisions models do exist?
A
- Normative decision models
• Specify how an (idealised) individual should make optimal decisions - Prescriptive decision models
• Use decision theory to offer step-by-step suggestions on how to proceed in a decision situation in order to make an optimal decision - Descriptive decision models
• Describe how individuals actually make decisions
18
Q
What is the Ultimatum game?
A
- Decision-makers have to divide a good between themselves and another person
- If the other person rejects the proposed division, both leave empty-handed
- Rules
• From a budget m, Player A offers p to Player B
• If Player B accepts, B gets p and A gets (m-p)
• If Player B rejects, B gets 0 and A gets 0 - Game-theoretic prediction
• A gives minimum positive amount possible (e.g. 1€ out of 100€)
• B accepts because any positive amount is better than Zero (e.g., 1€ is better than 0€) - Empirical findings
• Higher offers than minimum are made (on average, 44% of the available total amount) and low offers (<30% of the available total amount) are rejected
• Variations occur, but even in very different societies, game-theoretic prediction is supported - It’s about generosity and strategy
• Strategic consideration may crowd out impulses of generosity
19
Q
What is the dictator game?
A
- Decision-makers have to divide a good between themselves and another person
- The other person has to accept the proposed division
- Rules
• From a budget m, Player A offers p to Player B
• B gets p, A gets (m-p) - Game-theoretic prediction
• A gives nothing - Empirical findings
• Many people give something to the other person; on average, 28% of the amount - It’s about generosity
• Social norm for sharing
• Guilt aversion
• Generosity depends on social distance
20
Q
What is the prisoner’s dilemma?
A
- Two decision-makers independently have to decide between cooperation and defection
- While from an individual perspective defection is the rational solution, the overall outcome is better if both cooperate
Game-theoretic prediction: both players defect
Empirical findings: many people cooperate, trusting that the other person will also cooperate
21
Q
What is backward induction?
A
- Multiple rounds allow
• Learning about trustworthiness of partner
• Punishment for defection - Last round similar to one-shot game, therefore defection again rational strategy
- Backward induction
• Analysis of repeated decision problems
• Starts from considering rational solution in last round
• From that solution, rational solution in previous round can be derived, and so on
22
Q
What are decision anomalies?
A
- Decision anomalies: deviations from rational model
• In complex everyday decision situations often the rule, not the exception: Anomalies are quite normal
• Even decisions of experts in companies, political and administrative institutions - Decision anomalies result from
• Information processing
• Emotions
• Time
• Heuristics
23
Q
What is the Monty Hall dilemma?
A
- Decision-markers have to decide whether to revise a previous decision when presented with additional information
- Demonstrates that people have difficulties understanding probabilities
- Maximization strategy
• Switch - Empirical findings
• Very few people switch from their first choice
• Explanations:
-> Misunderstanding of probabilities
-> Regret
24
Q
What is affective forecasting?
A
- Prediction of emotional reactions to future events
- Four components
• Valence
• Specific emotions
• Intensity
• Duration
25
What is impact bias?
• Duration and intensity of emotional reactions to future events often overestimated
26
What is the projection bias?
tendency to assume that one’s future feelings and preferences will be similar to the current feelings and preferences
• “hot” versus “cold” states
• Focus on particular event; ignore other events
27
What is time discounting?
- Subjective value changes with time; future benefits and costs valued less than present ones
- Time discounting
• Preference for immediate utility vis-à-vis delayed utility in decisions where consequences occur at different points in time
- Problems:
• Short-term benefits vs long-term costs
• Discounting often inconsistent
28
What is fundamental law of effect?
* Increase in the probability of occurrence of the behaviour that receives the most reinforcement
* However, sometimes a less valuable alternative is selected
29
What is law of relative effect?
* Selection ratio of various behavioural alternatives is proportional to the subjective value of the reinforcements attached to these alternatives
* And inversely proportional to the time that passes between the behaviour and its reinforcement
30
What is Melioration?
* People often choose the alternative that puts them in a better position for the time being
* In the long run, melioration can counteract maximisation
31
What is the Better-than-average-effect?
• People believe they are better than others
• Positive traits more developed, negative traits less developed than those of other people
• Found in various areas such as
-> Skills (linguistic, didactic, driving)
-> Romantic relations
-> Health
-> Investment
• Often higher for low performers
• Serves to enhance self-worth
32
What is Peak and end rule?
• In retrospect, an experience is often not judged by its duration and the sum of all its elements, but is strongly influenced by outstanding elements and by the elements at the end
33
What is the hindsight bias?
• After learning an outcome, people tend to claim to have known that the event would turn out that way
• Found in various areas such as
-> Historical developments
-> Political elections
-> Economic developments
• Causes
-> Adaption of memories to enhance self-worth
-> Not remembering, but new prediction processes with outcome information as anchor and “motivated” answers
34
What are Heuristics?
- Rules of thumb that allow reaching a judgment or a decision quickly in a complex situation
- Advantages: easier and quicker than full analysis, often correct
- Disadvantages: can lead to systematic errors
• Several heuristics identified
• Availability heuristic, representativeness heuristic, anchoring and adjustment heuristic, mood-as-information herustic, affect heuristic
• Recognition heuristic, take-the-best heuristic, elimination heuristic
35
What are Mood-as-information heuristic?
• Mood: both encoding and retrieval – in a good [bad] mood, positive [negative] aspects are given more attention and later remembered
- Mood not only influences retrieval, but may also be used as information in itself
- Mood-as-information heuristic
• Judgments are based on the current mood
- Can lead to errors because relevant aspects are not considered, and mood may be caused by unrelated events
36
What is representativeness heuristic?
- Judgments are based on the similarity between an outcome and a model
- Relevant for judgements of category, frequency, probability, as well as evaluations or decisions based on these
- Can be correct because objects within a category share attributes
- Can lead to errors because similarity alone is not enough, and people neglect other important statistical rules:
• Essential attributes of population
• Sample size
• Randomness (gambler’s fallacy, hot hand fallacy)
• Combined probabilities (conjunction fallacy)
37
What is Gambler's fallacy?
• Mistaken belief that, after a sequence of one outcome, the other outcome becomes more likely
38
What is hot hand fallacy?
• Mistaken belief that, after a sequence of successes, another success becomes more likely
39
What is conjunction fallacy?
• People do not consider that combined events cannot be more likely than the constituting single events
40
What is the anchoring and adjustment heuristic?
- Judgments are based on a starting value and (inadequately) adjusted from that value
- Relevant for judgments and estimations of quantities, as well as evaluations or decisions based on these
- Can be correct because starting value may be a valid cue about actual quantity
- Can lead to errors because of
• Insufficient adjustment
• Uninformative anchors: random anchors, implausible anchors, strategic anchors
41
What is affect heuristic?
- Judgements are based on cues from positive and negative affect
- Relevant for judgments of risk, probabilities, quantities, as well as evaluations or decisions based on these
- Can be correct if affect provides valid cue
- Can lead to errors
• Halo effects: consistent perceptions of unrelated aspects
• Neglect of relevant aspects such as quantity or probability
- Phenomena
• Subjective judgements of risks and benefits often negatively correlated
• Quantities or probabilities neglected for affect-rich outcomes
42
What is fast and frugal heuristics?
- Idea: heuristics can be advantageous, part of “adaptive toolbox” developed over the course of evolution
- Fast and frugal heuristics: decision-making aids that allow a complex problem to be solved in a short period of time, using only a few pieces of information
- “frugal”
• Use only information about recognition (recognition heuristic)
• Use only one characteristic at a time (take-the-best heuristic, elimination heuristic)
43
What is recognition heuristic?
• Decisions are based on familiarity with objects
• When only one of two objects is recognised, that object is seen as more important
- Relevant for evaluations and decisions
- In cases where structure of environment fits with task, may provide advantages
44
What is the less-is-more-effect?
• In some cases, less knowledge can lead to better decisions because it allows using the recognition heuristic
- Not all characteristics are considered and evaluated simultaneously
45
What is take-the-best heuristic?
• Decisions are based on the one characteristic of options that seems especially relevant
46
What is elimination heuristic?
• Decisions are based on sequential elimination of alternatives
47
What is asian disease problem?
• Decision-makers need to choose between two intervention programmes with certain or risky consequences
• Demonstrates that risk preferences are influenced by framing effects
- Framing effects
• Decision-makers’ preferences depend on the problem presentation
- Critique on Asian disease problem
• In the scenarios, only the second descriptions give complete information whereas the first ones only mention how many die or survive
• Most study participants see the given numbers as approximate reference value, not absolute numbers
• Framing effects not found when number of affected people is smaller or when participants feel close to them
48
What is Prospect theory?
- Extension of subjective expected utility theory: people seek to maximize utility; probabilities and consequences matter, but several modifications
- Prospect theory
• Decision-making processes consist of an editing phase and an evaluation phase
• Major elements in the evaluation phase are the value function and the weighting function
49
What is the Editing phase?
* First stage of decision making
* Options are subjectively restructured and simplified
* Reference point is chosen that defines outcomes as gains or losses
50
What is Evaluation phase?
* Second stage
| * Options are evaluated according to the value function and the weighting function
51
What is the value function?
* Describes the relationship between objective outcomes (gain or loss relative to a reference point) and their subjective values
* Concave in the gains region and convex in the loss region (‘S-shaped’)
* Steeper in the loss region
* “loss-aversion”: losses are experienced more strongly than gains of the same size
52
What is the weighting function?
* Describes the relationship between objective probabilities and subjective decision weights
* Low probabilities receive higher weights, medium to high probabilities lower weights
53
What is the endowment effect?
- A good immediately becomes more valuable after a person has taken possession of it
- Studies by eliciting selling and buying values in objectively identical situations
- Selling values about twice as high or higher as buying / choosing values
- Explanation:
• Different reference points
• “giving up” is perceived as loss
54
What is the sunk cost effect?
- More likely that an endeavour is continued when resources have already been invested, even when these resources are irretrievable
- Irretrievable resources: only future outcomes should matter
- Negative developments: “Throw good money after bad”
- Explanation:
• Reference point shift
• Diminishing sensitivity for losses
55
What is Mental accounting?
- People record the costs and benefits of various operations, and
- Remember and settle them in event-specific ways
- Specific sums of money budgeted for specific decision categories
• If budget is used up, the probability that more money will be spent in this area sinks, even if it would be advantageous
• If budget is full, people spend easily, even if it is not very prudent
- Influences spending and saving decisions
56
What is hedonic framing?
- In mental accounting, gains and losses can be viewed in specific ways (integrated or separated) to increase satisfaction
- Building on the value function of prospect theory, for highest satisfaction
- Losses should be integrated: L(c) + L(d) > L(c+d)
- Gains should be segregated: G(a) + G(b) > G(a+b)
57
What is bounded rationality?
• Human ability to behave rationally is limited
58
What is the satisficing principle?
* In complex decision situations, decision-makers act within the limits of bounded rationality and
* Are content with a satisfactory alternative instead of the optimal alternative
59
What is the implicit favourite model?
- Decision-makers spontaneously choose one option,
- Then search for confirmation that this was the correct choice
- Decision makers often not aware that they have already made their choice
- Decision criteria isolated after the choice and calibrated to match the selected alternative
60
What is Groupthink?
• Groups make suboptimal decisions
• Occurs in highly cohesive groups
• Leads to suboptimal solutions through failure to define goals, selective information processing, insufficient evaluation of consequences and poor implementation plans
- Occurs even in expert groups
- Drivers of groupthink
• Cohesive group
• Isolated from other information sources
• Charismatic leader favours a certain solution
• High self-censorship and pressure to conform
• Invulnerability overestimated, collective rationalisation
61
What is garbage can model?
- Decisions occur as a coincidental combination of problems, solutions and decision-makers
- Describes decision-making in organizations
• Decisions, problems, solutions and members “float on through”
• Options and solutions only discovered coincidentally
• Decisions rationalized afterwards
62
What is muddling through?
- Decisions are taken in a step-by-step, incremental process
- Describes decision-making in political areas
• The more complex the task, the smaller the probability that rational strategies will be used
• Unsuitable coping attempts such as focusing only on easy subproblems or blindly imitating previous strategies
• Like walking through a swampland where the next step might bring doom: small steps in one direction, maintained until negative consequence occurs, then change
63
What is logic of success?
* Delineating concrete goals in complex decision situations
| * Taking into consideration interactions between goals
64
What is RAWFS model?
- Describes decision-making processes in uncertain decision situations
- Application of the tactics Reduction, Assumption-based reasoning, Weighing pros and cons, Forestalling and Suppression
- Interviews with military officers reporting decisions that contained uncertainty shows tactics for
• Reducing uncertainty
• Accepting uncertainty
• Suppressing uncertainty
- Developed into a model of decision-making
65
What is risk-defusing operators?
- Actions aimed at reducing the risk that negative consequences of a decision will occur
- Such actions can be taken
• Before a negative consequence arises or
• Afterwards
- Risk-defusing operators before the negative consequence are more frequent if
• Probability of discovering the negative consequence is los
• Fixing the negative consequence is difficult
66
What are Nudges?
• Attempts to structure decisions in a way that induces rational behaviour without curtailing individual freedom
• Encourage or steer behaviour, but without mandating or instructing, and ideally without the need for financial incentives or sanctions
- ‘Libertarian paternalism’
67
What is MINDSPACE?
- Framework for nudges
- Summarises nine robust effects on behaviour: Messenger, Incentives, Norms, Defaults, Salience, Priming, Affect, Commitments and Ego
- Components:
• Messenger: who communicates information
• Incentives: responses shaped by mental shortcuts and loss aversion
• Norms: what others do
• Defaults: pre-set options
• Salience: what is novel and seems relevant
• Priming: small cues influence information processing and behaviour
• Affect: emotional associations
• Commitment: consistency with public promises, reciprocity
• Ego: act in ways that make us feel better about ourselves
68
What is EAST?
- Framework for nudges
- For a specific behaviour to be encourages, it should be made Easy, Attractive and Social, and nudges should occur Timely
- Components:
• Easy: people are more likely to do what is easy
• Attract: people are attracted by what catches their attention and what appears attractive
• Social: people follow the herd
• Timely: interventions are more likely to influence behaviour before habits have been formed or when undesired behaviour has been disrupted
69
What is the Theory of social representations?
- Opinions are a complex result of experiences, emotionally loaded judgments, and information that is subjectively experienced, transformed and cognitively available
- Social representations consist of core elements and peripheral elements
- Social representations are formed through processes of anchoring and objectification
- Core idea: individual opinions are not idiosyncratic, but shared within a community
- Social representations as common sense
• Sum of knowledge within a community that forms the basis for actions
- Social representations broader concept than attitudes, more like belief systems
- Attitudes
• Summary evaluations of objects
• Can refer to all kinds of objects
• Evaluate such objects from negative to positive
70
What is the structure of social representations?
- Core elements
• Central parts
• Define the meaning of a social representation
• Organize the social representation
• Explicit and implicit basis for discourse
- Peripheral elements
• Make the core more concrete and understandable
• Adapt to the temporal development in context
• Protect the stable core of the social representation
71
What is the development of social representations?
- Anchoring
• Process where the social representation is linked to existing categories of representations
• During the process, existing categories and representations can change
- Objectification
• Process where the social representation is made vivid through quasi-physical objects
• “drawing a picture”
• Abstract concepts are represented as images, symbols or metaphors
72
What is Belief in a just world?
• People have the need to assume they live in a world that is just, and where outcomes are not determined by random events
• A just world is one where people get what they deserve, and where they deserve what they get
- Belief in a just world correlates negatively with support for social security
73
What is social categorisation theory and assimilation and contrast effects?
- Information about persons and objects is cognitively represented in schemata that are formed through categorisation
- Processes of social categorization help to structure social events and therefore offer a basis for actions
- Assimilation effects
- Similarities within a category are perceived as more pronounced than they actually are
- Contrast effects
- Differences between categories are perceived as more pronounced than they actually are
74
What is social identity theory?
- People strive for a satisfactory self-concept
- Part of the self-concept is determined by membership in groups
- Social identity arises from categorisation processes in which the social environment is divided into ‘own’ and ‘other’ environment
75
What is cognitive-development theory?
• Intelligence develops through adaption processes of assimilation and accommodation
• Four stages: sensorimotor intelligence, preoperational though, concrete operational thought, formal operations
- With increasing age, children develop specific steps in cognitive abilities (e.g., perspective taking, independence of a concrete object)
76
What is Financial literacy and what is it related to?
- The ability to understand and use financial concepts
- Often very low levels of financial literacy in general population
- Financial literacy related to
• Socio-economic factors (women, groups with low general education, minority groups fare worse)
• Unfavourable economic outcomes (e.g., less savings)
• Potential vicious circle
- Financial literacy related to relevant economic behaviours
• Retirement planning
• Credit card debt among students
• Consumer debt
• Higher costs on credit card borrowing and mortgage
- Financial literacy can come from parents, work experience or financial education
- Financial education
• evidence mixed: specific goals better than general financial literacy
• overall positive effect, but very small; ‘just-in-time’ education more efficient
77
What is financial capability?
```
- includes financial literacy, but also
• skills
• confidence
• and attitudes regarding financial concepts
- Five domains in addition to financial knowledge:
• Managing money – making ends meet
• Managing money – keeping track
• Planning ahead
• Choosing products
• Staying informed
- Variations in financial capability are less a matter of information but more a matter of psychological differences (biases):
• Mental accounting
• Information overload
• Status quo bias
• Procrastination
• Regret
• Loss aversion
- Financial capability programs should take into account such biases
```
78
What is resource theory?
• Social interactions are based on the exchange of different resources, including money, information, goods, services, status and love
79
What is selective outcome correction process?
• Errors that occur in price comparison are more likely to be detected and corrected when they are inconsistent with expectations
80
What is the Price-quality heuristic?
• Belief that there is a positive correlation between price and quality
- Consequences
• Choosing the more expensive product
• Experiencing the more expensive product differently
-> Same wine more enjoyed when consumers thought the bottle costs €45 vs €5
-> Same energy drink “worked less” when consumers thought it was on discount: they solved fewer puzzles
- Rather strong correlation between price and perceived quality
- In contrast, rather low correlation between price and objective quality
- Large variations in correlation across product categories
• Stronger for more expensive products
• Stronger for products where consumers can recognize quality more easily
- Consumers not good in identifying product categories with higher correlations
- Price is a poor signal for objective product quality
81
What are Psychological prices?
- Prices that try to evoke the impression that they are considerably below a round number
- One form: 9-ending prices
- Psychological prices often involve the digit 9
• As ending digit (e.g., 2.79), or
• As last significant digit (e.g., 1900)
82
What are 9-ending prices?
• Psychological prices that have the digit 9 at a significant ending place (e.g., 15.90)
• Can influence consumers through image effects and level effects
- Potential level effects: rounding down, left-to-right comparison, memory effects
- Potential image effects: product seen as of poorer quality or as being on sale
- 9-ending prices are rather prevalent
• In newspaper price ads, 31% of prices ended in 9
• After euro transformation, price digits reverted to previous distribution quickly
- Actual effects of 9-ending prices disputed, empirical evidence mixed
• Some studies report a clear advantage
• Other studies report negative effects, no effects, or mixed effects
83
What are the suggested mechanisms with 9ending prices?
* Level effects: 9-ending prices influence the perception of the price as such
* Image effects: 9-ending prices influence the perception of the good or the perception of the relation between the good and the price
84
What are extensive and syncratic decisions?
Extensive decisions: involve complex information processing
- Syncratic decisions: made jointly by two or more persons in a household
- Syncratic decisions are more likely when:
• Cognitive scripts are not available
• Financial commitment is high
• Social visibility is high
• The decision has implications for the whole household
85
What is a conflict and its types?
- A difference of opinion among the people concerned
- Conflict types
- Probability conflicts
people agree about the goal, but disagree about the best way to reach the goal
- Value conflicts
people disagree about the goal to be pursued
- Distribution conflicts
people disagree about the distribution of resources
86
What are hierarchy-of-effects models and the AIDA model?
- Advertisements influence consumer behaviour through several steps
- AIDA model
assumes that advertising works through the stages of attention (A), interest (I), desire (D) and action (A)
- Later variations of this model
- Later models question the assumption of a fixed sequence of “think-feel-do”
- Different purchase situations have different sequences
- Low vs high involvement
- Thinking vs feeling
- Critique
• Empirical support is weak
• Simplistic view of consumer behaviour (without moderators and processes)
- Moving away from trying to capture consumer behaviour in a single model, towards models for specific processes (e.g., attitude change or information processing)
87
What is the Elaboration likelihood model?
assumes that persuasion can occur through a central or a peripheral route
- Central route:
• If highly involved in a topic
• Carefully consider arguments, evaluate arguments, change attitude accordingly
- Peripheral route:
• If not very involved in the topic
• React to heuristic cues and their valence
88
What is the reflective-impulsive model?
a specific behaviour is not either impulsive or reflective, but often comprises components of both processes in different strengths
• Strength of reflective component will be higher if the topic is more important and consumers are held accountable for their actions
• Strength of impulsive component will be stronger if consumers have a strong habit in a certain consumption domain
89
What is Hedonism?
search for pleasure and increased gratification
- Consumers with hedonic orientation pursue other goals than the basic use value
• Self-image
• Attention in social environment, winning status or looking attractive
• “style become more important than utility”
90
What is Pathological buying?
- In some cases, shopping becomes a goal in itself; shoppers even throw the goods away as soon as they get home
- Pathological buying
• A more general term than compulsive buying or shopping addiction
• Describes a preoccupation with shopping, strong urges to shop, and guilt after the frequent shopping episodes
• Pathological buying is often accompanied by distress, marital conflicts and financial problems
- Shopping addiction
driven by intense positive feelings experienced during shopping
- Compulsive buying
driven by a reduction in tension and anxiety provided by shopping
- Pathological buying caused by combination of biological, social and psychological factors
- Although ownership is not the motive, usually a preference for goods with high symbolical value
• E.g., sporting goods and high-tech products for men
• E.g., jewellery, clothing shoes for women
91
What is doing gender?
attempts to neutralise violations of societal gender norms (e.g., the ‘male breadwinner’)
92
What are models of purchase decisions in private households?
- Assumes that decisions are influenced by
• Product and conflict type
• Power and harmony in the relationship and the resulting interaction principles
• Regulation of benefits such as utility debts or influence debts
93
What are autonomous decisions?
- Decisions made by one partner while taking into account the other partner’s preferences
- Preference for a decision alternative is based…
• … on the extent to which it satisfies one’s own needs,
• … and on the value it has for the other partner
94
What are regulation of benefits?
- Even after agreement, process continues by considering the benefits for each partner
• Influence debts: one partner may have more influence in a specific purchase decision and therefore incurs influence debts that need to be balanced out in future decisions
• Utility debts: one partner may have more utility from a specific purchase decision and therefore incurs utility debts that need to be balanced out in future decisions
- Regulation of benefits: if one partner has had more influence/utility, the other partner can decide about the next purchase or buy something he or she profits more from
95
What are interaction principles?
• Close relationships differ in terms of power, structure and harmony
• Can be described by four interaction principles: love principle, credit principle, equity principle and egoism principle
- Love principle
• High on harmony, power irrelevant
• Partners are altruistic; each person does favours without expecting repayment; utility debts irrelevant
- Credit principle
• Intermediate on harmony, power irrelevant; relationship ensembles one between good friends
• Utility debts can remain open for long periods of time, but balance is aimed for in the long run
- Equity principle
• Low on harmony, power distributed equally; interactions between partners resemble those of business partners
• Utility debts need to be restored immediately
- Egoism principle
• Low on harmony, imbalance of power in favour of one partner; interactions between partners resemble those of business partners
• The partner with more power decides how and when utility debts need to be settled
96
What are synthetic families?
groups of strangers that mimic a traditional family structure by consisting of a male and a female participant of about equal age plus another younger person
Problems: no real relationship, no common history and future
97
What are Diary methods?
- Measures (usually short questionnaires) that are repeatedly completed in a real-life situation, at either a specific time or a specific event
- Advantages: less recall errors, higher ‘ecological validity’
- Problems: high effort for respondents
- Decision diary
• A specific form of diary methods to study decision-making in close relationships
98
What is Role triangle?
• Product-specific influence in purchase decisions
• Influence distribution between men and women in close relationships
- Survey “who decides…?” “male” – “female” – “jointly”:
• Percentages of joint decisions
• Partners’ average influence
- Four areas of control
• Syncratic decision: if over 50% of respondents decide jointly
• Female-dominated decision: if average influence favours female
• Male-dominated decision: if average influence favours male
• Balanced decision: if average influence lies in between
- Recent studies similar patterns as 1970’s, no differences between age groups
- No increase in joint decisions, but in autonomous decisions
99
What are relative resources theory?
• Influence in decisions in close relationships determined by prevailing social norms and the partners’ relative contributions of material and immaterial resources
• Supported until 1980s, not supported in more recent studies
- Informational pressure: relative knowledge and competence increase influence
- Interest: relative relevance increases influence
- Decision making history: balancing over time
100
What is the Vienna Diary Study?
- An extensive study on household decision-making using the decision diary, conducted at the University of Vienna
- 40 couples reported over one year, every evening, on decisions during the day
- Findings on influence:
• Influence rather balanced between women and men. Women exerted between 46% (economic matters) and 52% (career, housework matters) of influence
• Influence depends on their relative interest in the product, relative competence and influence debts
- Similar study in Vietnam showed no effect of influence debts, indicting a segmentation of gender role
101
What are influence tactics?
ways in which partners in close relationships try to convince the other person of the accuracy of their own perspective and the advantages of their own preferences
- Various tactics
• Persuasion tactics (e.g., doing small favours, insisting, coalitions, …)
• Bargaining tactics (e.g., trade-offs, integrative bargaining)
• Conflict avoidance tactics (e.g., deciding according to roles)
• Problem-solving tactics (e.g., factual information)
- Choice of tactics depends on
• Gender: women more integrative bargaining
• Relationship quality and length of partnership: happy couples more emotionally positive tactics
• Type of conflict
-> Value conflict: more persuasive tactics
-> Distribution conflict: more bargaining tactics
-> Probability conflict: more problem-solving tactics
- Choice of tactics does not seem to depend on
• Power structure
• Personality
102
What is integrative process model of consumer credit?
credit use can be described in three phases before, during and after credit take up
• Phase 1: psychological processes leading up to the decision to borrow
• Phase 2: psychological processes when choosing between credit options
• Phase 3: psychological processes during repayment
• All three phases influenced by situational and personal characteristics
103
What is Time and outcome valuation model?
- Credit involves intertemporal choice: immediate pleasure of consumption and delayed burden of repeated repaying
- Consumers tend to underestimate the repayment
• Cannot calculate the periodical instalments or costs of interest correctly
• Underestimate the duration because of strong discounting of future costs
- Time and outcome valuation model
value function in prospect theory becomes more flat for outcomes occurring in the future as compared to outcomes in the present
104
What is choice bracketing?
1) Grouping of outcomes and decisions
• Choice bracketing: whether several decisions are considered jointly or in isolation
• Narrow bracketing can lead to suboptimal decisions and overspending
105
What is double-entry mental accounting model?
- Provides framework for transactions that involve intertemporal trade-offs (e.g., purchasing a good or credit)
- Double-entry mental accounting model
• Transactions are booked in mental accounts as streams of future pleasure of consumption and pain of payment
• These streams can be linked in the mental account to varying degrees (coupling)
- Coupling is the degree to which thoughts of payment arouse thoughts of consumption and vice versa
- If consumers strongly couple payment and consumption, every consumption episode is attenuated by the disutility of outstanding debt
106
What is the equilibrium wage?
• The wage where supply and demand for labour correspond to each other
107
What is Full employment?
• The employment situation at the equilibrium wage
• All workers who are willing to work at this wage level find a job
- Involuntary unemployment when wages are above the equilibrium wage
108
What is Voluntary unemployment?
* The unemployment situation at the equilibrium wage
| * All workers who are not willing to work at this wage level are considered “voluntarily” unemployed
109
What is the Critique of Voluntary unemployment?
- “Voluntary unemployment” disregards psychological costs
• Accepting a job could involve a long commute or a move to another city: not just financial, but also social costs
• Costs associated with retraining, a career change or taking a job below the qualification level are often unacceptable
- Employer oft voluntarily set wages above the equilibrium because they fear that workers will reduce performance if wages fall
• Experiment on minimum wage
-> No minimum wage: low wages
-> Minimum wage: wages considerably above the minimum wage; “only” minimum wage was considered unfair
110
What is the Trust Game?
• A decision problem where decision-makers can either keep a money amount or hand part of it to another person
• That part is then usually multiplied by some factor
• The other person can then decide whether to keep the resulting money amount or return part of it
- Rational solution: Player A keeps everything
- Empirical findings:
• On average, 50% (between 22% and 89%) are given to B
• On average, 37% (between 22% and 81&) are given back to A
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What is the Centipede game?
• A decision problem where decision-makers repeatedly can either keep a money amount or pass it on to another person
• If they pass it on, the amount is multiplied by some factor and then the other person can decide to keep the resulting amount or give it back
- Rational solution: If number of rounds is known, by backwards induction Player A keeps everything in the first round
- Empirical findings: People often do not apply backward induction
112
What is the Beauty contest?
- Task: From the numbers 0-100, write down the number corresponding to two-thirds of the mean of all numbers written down by all participants
• Rational solution: 0
• But what is the winning number when taking the limited rationality of the other players into account?
- Beauty contest
• A decision problem where decision-makers have to give an estimate that requires them to put themselves in the position of the other players, take their limited rationality into account in their own estimate, and anticipate the others’ estimates
113
What is reciprocity on the labour market?
- Psychological perspective: fairness and reciprocity regulate social relationships and thereby also markets
- Wages will be higher than the market-clearing wage
• Norm of reciprocity: behaviours of others should be returned in kind (e.g., putting in more effort for higher wages)
• Reputation (e.g., accepts low wages, does not reciprocate)
- Empirical findings:
• Average wages are considerably higher than market-clearing wage
-> When workers can react to wage offers with effort
-> When reputation can be built
• Strong correlation between wage level and effort
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What are altruistic punishments?
- Fairness plays an important role in human interaction
• People react angrily to unfair behaviour and are willing to punish unfair people even if they do not profit from it or incur costs
• Punishment of free-riders causes reward-related neural activities, even if suffering a monetary loss
- Altruistic punishment
• Punishment dealt out by people although they do not profit from this punishment and even when they incur costs by doing so
- Altruistic punishments ensure cooperation in the community
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What are public goods game?
• A decision problem where decision-makers can either keep a money amount or give part of it into a common pool
• Sum of contributions in the common pool is usually multiplied by some factor and distributed equally to all decision-makers
- Often used to study cooperation
• Largest profit for everyone when all participants give the full amount to the common pool
• However, the dominant strategy is free-riding: each player’s profit is higher when they do not give anything but get a portion of the common pool
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What is the V-I-E-Theory?
- Valence-instrumentality-expectancy theory
• Assumes that motivation is a function of the valuation of outcomes, the subjective connection between an action and outcomes, and the subjective belief about the feasibility of an action
- Valence: subjective intrinsic value of an action, or of the results of an action
- Instrumentality: subjective connection between an action and more or less valuable outcomes
- Expectancy: subjective belief about the feasibility of an action
117
What is the equity theory?
• Perceptions of fairness are a function of comparing one’s own ratio of outcomes to inputs with the ratio of outcomes to inputs of other people
118
What is an Entrepreneur?
a person who detects or creates business opportunities and exploits these opportunities through small and medium-sized firms
• “head of the firm and coordinates the factors of production; introduces new methods, processes, and products and creates opportunities for economic growth; bears the risks connected with his or her activities; and enjoys power and high status in capitalist market societies”
- Term “entrepreneur” is often used also for
• Company founders who do not take over management
• Executives, company or department heads (managers)
• Investors
- Typology
• Entrepreneurs: discover and exploit opportunities
• Capitalists: capital owners, shareholders
• Managers: administrative functions, manage resources
- Psychological perspective:
• Certain characteristics distinguish entrepreneurs from other market participants, e.g., personality, motivation, etc.
119
What are the characteristics of entrepreneurs?
```
- Specific characteristics seem to be crucial for entrepreneurs:
• Willingness to take risks
• Independence (autonomy)
• Emotional stability
• Extraversion
• Achievement motivation
```
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What is the regulatory focus?
- Different motivational states: “regulatory focus”
- Prevention focus
a motivational state in which people concentrate on protection and security, as well as on avoiding losses
- Promotion focus
a motivational state in which people concentrate on growth and accomplishment, as well as on potential gains
- Regulatory focus interacts with industry environments (stable or dynamic)
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What are the orientations at founding a company?
- Founding of companies and founding success related to striving for achievement, pursuit of innovation, stress tolerance, need for autonomy, proactive behaviour
- Founding success related to action control
• Action orientation: tendency to convert intentions into actions
• State orientation: tendency to bound up in thoughts that relate to current, past or future states and that impede the systematic implementation of an action
- Successful entrepreneurs exhibit more action orientation in risky situations, but more state-orientation in success situations
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What is entrepreneurial alertness?
- Ability to discern business opportunities precisely and quickly and to have a ‘feel’ for them
- Combined with attributional styles to 4 types of entrepreneurs:
True believers | Clueless
Practical | Reluctant
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What is Entrepreneurial orientation?
```
- Intrapreneurs
• Entrepreneurially oriented employees (e.g., considering founding their own business)
- Entrepreneurial orientation correlated with
• Proactive behaviour
• Innovation orientation
• Need for achievement
• Social competence
• Field-specific professional skills
• Field-specific self-reliance
- Predictors for entrepreneurships
• Personality (achievement orientation, extraversion, emotional stability)
• Ability
• Early interest
• Supportive parenting style
- Developing entrepreneurial orientation
• Participating in an entrepreneurial program led to a positive attitude toward self-employment and brought out students’ entrepreneurial potential
```
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What is the efficient market hypothesis?
- All of the information available at a given time should be reflected in the price of the traded securities
- Many market participants are immediately aware of all freely available, relevant information; process them quickly and fully; and behave in a rational, goal-oriented manner, buying and selling according to price without any noteworthy transaction costs
- Price formation proceeds immediately, including all information
- Price level accurately reflects expected dividend payments and expected increases in value
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What is the random walk hypothesis?
- Even if individuals are not able to process all available information immediately and correctly, and to adapt their operations, individual failings are assumed to balance each other out
- Random walk hypothesis
- At the aggregate level, the prices of securities represent their fundamental values and vary only unsystematically
- Due to the market’s ability to self-regulate, prices vary completely at random around the fundamental values
- New information would be immediately reflected in demand and supply and therefore in prices
- Nothing about the future price movements can be learned from previous ones
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What are noise traders?
• Do not behave rationally, but instead do not take some information into account, place too much value on rumours, and make many more trades than would be the case among rational traders
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What are passive traders?
• Do not behave rationally, but instead make purchases and then do not trade again for a long time, and make much fewer trades than would be the case among rational traders
128
What are memory errors?
- Hindsight bias hinders making necessary corrections
- Hindsight bias due to
• Simple memory errors
• “knew it along along”
• Creeping determinism: the belief that something ‘had to turn out this way’ after knowing the outcome
- At the end of trading day, traders call developments self-evident even if the day before they predicted differently
- Successful traders less likely to show hindsight bias
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What is the disposition effect?
- Investors hold on to losing stocks for too long, and sell winning stocks too quickly
- Analysis of trading records for 10,000 accounts in a brokerage house showed that
• Winning stocks (as compared to buying price) were sold more often than losing stocks: 15% of all sales were winning stocks, compared to only 10% of losing stocks
• Asymmetry confirmed when only 10% most active traders (presumably experts) were considered
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What are explanations disposition effect?
- Prospect theory: buying price as a reference point; more risk-seeking in loss domain
- Reluctance to sell losing stock: disposition effect becomes smaller when participants are forced to sell after each round with the option to rebuy
- Not the expectation that losing stocks will recover: investors avoid selling even when they could use advantageous tax swaps
- Tax swaps
selling losing stocks, using the money to buy stocks with similar risk and return prospects, and deducting the realised losses from the investor’s taxes
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What is the house money effect?
- Previous gains can lead to greater risk seeking
- Stock traders sometimes do not yet consider the recently earned profits from stock sales to be their own money; easier to take greater risks
- Only apparent among currency traders working for profit-oriented banks, not central banks
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What is the starting low but ending high effect?
- Opposite to anchoring, high starting values not always lead to high final values – stocks issued at low values often reach high closing values at first trading day
- Starting low but ending high effect
• In auctions, low starting prices can lead to high final prices
- Reasons:
• Reduced entry barriers: low starting prices encourage participation in auctions and stock purchasing
• Sunk costs: low starting prices entice bidders to invest time and energy in the auction or market, and to continue due to sunk cost effects
• Brisk participation: bidders might conclude that particularly valuable goods are at stake, which makes them willing to pay a higher a price
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What is heuristic risk diversification?
- Diversification as strategy to reduce risk: Optimal portfolios should promise high returns with a fixed level of risk: own various types of securities whose price developments are not correlated with one another
- Investors often diversify naively and insufficiently
- 1/n heuristic
• Based on naïve diversification
• Investors tend to spread their assets equally among several options without taking into account the risks of each option and the correlations between risks
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What is the home bias?
- Insufficient diversification between national and international investments
• Investors often select stocks of domestic companies, i.e., from their own country
• Neglects that the risk of domestic companies is stronger correlated
- Home bias
• Investors tend to select stocks from their own country
• Therefore ignore that the values of these stocks correlate more closely with one another than do the values of stocks from different countries
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How do moods and emotions influence decision-making?
- Incidental affect: emotions and moods that are experienced at the time of decision-making but have no connection to the task at hand
- Integral affect: emotions and moods that are directly linked to the decision itself
• Anticipated emotions: concern the consequences of a decision (e.g., delight, disappointment)
• Anticipatory emotions: concern the immediate visceral reactions to risk in a decision (e.g., dread, anxiety)
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What are social influences on financial markets?
• Influence via interpersonal communication and group processes
• Influence via media information
• Influence via observing other investors’ behaviour
- Herd behaviour
• Tendency among investors to follow the behaviour of other investors blindly
- Conformity with the crowd in buying and selling stocks, even when facts do not give good reasons
- Information cascades
• Investors ignore their private information and imitate others
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What are speculative bubbles?
- A situation where a large difference between the market price of an investments and its fundamental value occurs
- Examples: tulip mania, dotcom bubble
- Experimental studies showed that inexperienced traders produced long-lasting bubbles; fewer bubbles when traders were educated in game theory
- Mechanisms responsible for the development of speculative bubbles
- Financial contagion
spread of speculative bubbles via physical cash flows in the international and global trade of goods
- Mutual psychological contagion
similar to the way an infectious disease spreads, investors’ emotions, attitudes and expectations ‘infect’ others
- Psychological escalation
similar to feedback on a microphone: external trigger (e.g., a media report) generates interest among investors; some purchase the stock; therefore, prices increases; media reports on price increases generate even more interest among investors
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What is wisdom of the crowd?
- A statistical effect where an aggregate collective judgment is more accurate than individual judgments
- Depends on independent random selection
- Example: estimate how many beans are in a jar
- Importantly, investing often is not independent: Process of herding usually initialized by influential people, institutions and media outlets
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What is trust in financial institutions?
- Trust as “the expectation that the other party will perform a particular action important to the trustor, irrespectively of the ability to monitor or control the other party”
- Trust decisions different from risky decisions
• Trust behaviour despite cynical views about trustworthiness of other party
• Emotional components
• Social components: moral normal, in particular respect
- Trust
• The acceptance of vulnerability to the actions of another party
• Reason-based trust versus implicit trust
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What are the forms of trust in financial institutions?
- Reason-based trust
• Reflective processes
• Based on perception to depend on another party to achieve a specific goal, evaluation of the trustee’s willingness and ability to achieve the specific goal, specific opportunities or hindrances
- Implicit trust
• Automatic and unintentional processes
• Based on perception of similarity between the trustor and trustee, shared social identity, and shared values
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What is value congruence?
fit between values held by financial institutions and their clients
142
What is the Shadow economy?
- Broad definition: Those economic activities and the income derived from them that circumvent or avoid government regulation, taxation or observation
- Includes
• Services within private households (e.g., washing clothes)
• Income from legal sources within alternative economies (e.g., communes)
• The economy of “friends of friends”
• Illegal businesses (e.g., drug dealing, selling stolen goods)
- Narrow definition: the market-based legal production of goods and services that is deliberately concealed from public authorities
- Reasons for concealment
• Avoidance of paying income tax, value added tax or other taxes
• Avoidance of paying social security contributions
• Avoidance of complying with labour market regulations
• Avoidance of complying with administrative obligations
- Definition excludes illegal activity
- White-collar crime: illegal and prosecutable behaviour by organisations or their members (e.g., product piracy, fraud, corporate tax evasion)
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How can one measure the shadow economy?
- Direct procedures at the micro-level for measuring the magnitude of the shadow economy at a specific point in time (e.g., surveys, audits by tax authorities)
- Indirect methods to identify micro-level indicators of developments in the shadow economy over time (e.g., differences between household revenue and expenses)
- Modelling approaches using statistical estimation procedures (e.g., cash circulation)
144
What are the correlates of shadow economy?
- Size of shadow economy correlated with
• Tax system: larger when taxation rates rise, and penalties and audit possibilities decrease
• Tax morale: negatively correlated with black labour market
- Tax morale
• An intrinsic motivation arising from the moral obligation to pay taxes correctly
145
How are taxes and income distribution correlated?
- Taxes can regulate income distribution within a country
- Lorenz curve
• Shows the distribution of income within a country
- Gini coefficient
• Measures the degree of concentration in a country’s income distribution
• Measures the area between the Lorenz curve and an equal distribution line, relative to the total area under the equal distribution line
146
What is Tax compliance?
- Taxpayers’ willingness to pay their taxes
- Neutral term, can be differentiated into
• Committed compliance: willingness to pay without complaint
• Capitulative compliance: reluctantly giving in
• Creative compliance: efforts to reduce taxes within the letter of the law
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What is tax non-compliance and what does it exist of?
- Most inclusive conceptualisation of the failure to meet tax obligations, regardless of whether the failure was intentional
- Tax avoidance
• tax liability by taking advantage of loopholes in the law
- Tax circumvention
• tax liability that are against the spirit and purpose of the law
- Tax evasion
• to reduce tax liability by breaking the law
- Continuum of tax behaviour from committed compliance to tax evasion
148
What is the Economic theory of criminal behaviour?
• Criminal behaviour can be understood as consideration of costs and benefits
• Therefore the threat of punishment has a deterrent effect if crimes are discovered and punished
- Early models of tax behaviour based on this approach: assuming that tax honesty depends on audit probabilities and fines
- However, empirical findings suggest that influence is smaller than expected
149
What is the bomb crater effect?
- Audits and fines have no long-lasting effect: “bomb crater effect”
• In tax experiments with several rounds, compliance often strongly drops after an audit
- Audits as signal for lack of trust
• Audits and negative sanctions contribute to mistrust and promote deliberate decision-making
• Deliberate decision-making can crowd out the intrinsic motivation to cooperate
- Punishments that are perceived as disproportionate lead to negative attitudes towards tax authorities
150
What is a social dilemma?
• Decision problem where individual interests are opposed to the goals of the community
• Individuals can gain by acting selfishly, but
• The community (and ultimately the individual) are harmed if too many individuals act selfishly
• Can be studied in public goods game
- Interpersonal trust and institutional trust are important to ensure cooperation
- Social norms are assumed to influence tax behaviour
- Analysis paradigm “Social contribution dilemma”
• Focus on individual taxpayers and the group; behaviour of authorities kept constant
• Government and tax accountants neglected
• All taxpayers assumed to be the same, but with both utilitarian and social-normative motivations
• Still authoritarian view regarding controls and punishments
151
What are motivational postures?
• Different standpoints that taxpayers take in their interaction with the tax authorities
- Five motivational postures
• Commitment: moral obligation
• Capitulation: accepting necessity
• Resistance: fight against authorities
• Disengagement: non-cooperation with authorities
• Game-playing: no respect for authorities, seek advantage
- Depending on the motivational posture, different regulatory strategies should be used, ranging from self-regulation to command regulation
152
What is the psychological contract?
• Refers to implicit assumptions of rights and duties of management and employees
• In tax research, it means the expectations and commitments between tax authorities and taxpayers that go beyond legal regulations
- Reciprocity of commitments implies that pressure is answered with reactance (‘cops and robbers’)
153
What is tax cooperation?
• Attention shifts from taxpayers alone to the relationship between tax authorities and taxpayers
• Taxpayers seen as cooperative partners that have a sense of community and recognise the value of cooperation
• “tax cooperation” instead of “tax compliance”
• Tax cooperation
-> Correct taxpaying out of a perspective of equality
• Focus on equal-status partners whose cooperation is not predominantly formally regulated, but rather regulated by a psychological contract
154
What are the three paradigms of tax administration?
- Enforcement paradigm
• Refers to a view of taxpayers as potential criminals, so that tax honesty is to be achieved through audits and fines
- Service paradigm
• Refers to a view that tax honesty can be achieved by easing the way, e.g., through service offers
- Trust paradigm
• Refers to a view that tax honesty can be achieved by building trust between tax authorities and taxpayers
155
What is the Slippery slope framework?
- Tax behaviour is a function of trust in tax authorities and power of tax authorities
- Two determinants of tax compliance
• Power of authorities: Taxpayers’ perception of the potential of tax authorities to detect and to punish evasion
• Trust in authorities: taxpayers’ perception of tax authorities as benevolent and working for the common good
- Two forms of tax compliance
• Enforced compliance: exertion of power by the state; audit frequency and severity of fines
• Voluntary cooperation: trust in the state and its authorities; tax system as just, cooperation as social norms
156
What are the two different types of power?
* Legitimate power: based on positive evaluations of authorities’ power and positive attitudes towards authorities
* Coercive power: based on tax authorities’ ability to enforce a law regardless of its societal acceptance
157
What is horizontal monitoring?
* An approach to taxation based on a good relationship between the taxpayer and the authorities, which is recorded in a compliance agreement
* Based in mutual trust; tested in the Netherlands
158
What are postmaterialist values?
- Changes from materialist values to postmaterialist values
- Postmaterialist values
• Values emphasising autonomy and self-expression
- Material prosperity achieved, therefore higher valuation of leisure time and hedonic experiences and higher expectations regarding work (self-expression, autonomy, …)
159
What is the job characteristics model?
- Intrinsically motivating work requires knowledge about the results, experienced responsibility and experienced meaningfulness
- Three critical psychological states
• Knowledge about the results of one’s work
• Experienced responsibility for outcomes of one’s work
• Experienced meaningfulness of one’s work
- Five core job dimensions
• Feedback
• Autonomy
• Skill variety
• Task identity
• Task significance
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What is the Motivating potential score?
• The degree to which a task can be intrinsically motivating
Motivating potential score = (skill variety+task identity+task significance)/3*Autonomy*Feedback
- Implications for work structure and job design
161
What is the Job demand-resources model?
- Organisational outcomes result from the interplay between job demands and job resources
- Job demands
• Job aspects that require physical or psychological effort
- Job resources
• Job aspects that help achieving work goals, reduce job demands, or stimulate personal growth
- Two processes of strain and motivation
- Interactions between job demands and resources
• High job resources reduce influence of job demands on strain
• High job demands increase influence of job resources on motivation
162
What is work-life balance?
- Work-life balance
• Distribution of working and non-working time
• Subjective feelings of balance and satisfaction with regard to this distribution
- Compatibility of family, private life and career success; organisation of these spheres; balancing of employers’ and employees’ interests
163
What are the different hypotheses regarding the associations between work experiences and leisure experiences?
• Neutrality hypothesis
-> Experiences and behaviour at work and during leisure time have no connection to one another
• Generalization hypothesis
-> Positive experiences and behaviour at work are generalised to leisure time
• Compensation hypothesis
-> Positive experiences and behaviour during leisure time balance out negative experiences at work
• Interaction hypothesis
-> Experiences and behaviour at work and during leisure time have mutual effects on one another
• Congruence hypothesis
-> Experiences and behaviour at work and during leisure time are associated with one another through third variables
164
What is job detachment?
• Refraining from job-related activities and thoughts during after-work hours
- Job detachment (during leisure time) important for well-being
165
What is Marienthal?
- 1930s: first studies on psychosocial consequences of unemployment
“Great Depression”: unemployment rate in industrialised countries over 20%
- Marienthal
• An Austrian village where a very influential study on the consequences of unemployment was conducted in the 1930s
• Starting 1931, researchers studied unemployment in Marienthal where a large majority of residents became unemployed when the only factory was shut down
• Wide variety of methods to capture life in the village, e.g., statistics from consumer cooperative; interviews with teachers and businesspeople; schoolchildren’s essays; diaries on activities; observation of walking
166
What are the four types aligned in the Marienthal experiment?
• Unbroken: made plans for the future, looked for work; well-being good
• Resigned: made peace with the situation, fewer plans; well-being good, household and children well-cared for
• Despairing: hopelessness, depression; household and child care kept afloat
• Apathetic: completely hopeless; frequent family conflicts, alcohol problems, household and children neglected
- Changes in experience and usage of time: especially for men, days becoming empty and homogenous; slower walking
167
What is the four-phase model of unemployment?
* Unemployed persons go through phases of shock, optimism, pessimism and fatalism
* Shock: distress immediately after losing the job
* Optimism: intensive efforts to find work
* Pessimism: anxiety and fear
* Fatalism: unemployment perceived as unchangeable fate
168
What is the Theory of learned helplessness?
* People learn to become helpless when they have no influence or control over adverse conditions
* Typical reactions to a lack of control: passive, resigned, rigid modes of behaviour and failure-oriented attitudes
* Unemployment: explanation for later phases (pessimism, fatalism)
169
What is subjective control?
• Number of behavioural options that allow a person to deal with situational conditions in ways that serve his or her individual goals, needs, interests and desires
• Unemployment: subjective control decreased with continuing unemployment; lack of subjective control accompanied by depressiveness
- After critical life events, well-being often returns to original levels
170
What is set-point models?
• Drops in life satisfaction triggered by life-altering events balance out over time due to adaptation processes
• Unemployment:
-> Set-point models would suggest that long-term unemployed should have adapted and be as satisfied as before losing their jobs
-> Empirical studies show the opposite: the longer a person is unemployed, the more severe the negative effects on health and well-being
171
What are the types of entrepreneurs?
* True believers: Represent the “typical” entrepreneur; would like to bring about change, believe in themselves; high potential and high dedication to founding; score highest in risk appetite and achievement motivation
* Clueless: little knowledge about the market; become self-employed less often
* Practical: notice new opportunities fast, but tend to overlook them because their attributional style makes them sceptical; take action when they are encouraged, often not confident enough for succeeding
* Reluctant: unmotivated to gather new market information; reasons for becoming entrepreneurs: losing a job etc.
172
What is positive psychology?
- Satisfaction research originated in psychology and sociology
• Critique: place too much emphasis on negative events
• Counterpoint: “positive psychology” studies positive experiences, such as happiness and satisfaction
173
What are qualities of life?
• Different aspects of life satisfaction that arise from a combination of life chances versus life outcomes and outer qualities versus inner qualities
Liveability of the environment | Life-ability of the person
Objective utility of life | Subjective appreciation of life
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What is emotional well-being?
* Emotional component of subjective well-being
* Current positive and negative affect, and happiness as more enduring positive emotional state
* Situation-dependent
175
What is life satisfaction?
• Cognitive-evaluative component of subjective well-being
• Long-lasting
• Not situation-dependent
- Differentiating between momentary and habitual as well as mental and physical well-being
176
What are forms of well-being?
```
• Momentary mental well-being
(e.g., feelings of joy, happiness)
• Habitual mental well-being
(e.g., persistent optimism)
• Momentary physical well-being
(e.g., feelings of strength, vitality)
• Habitual physical well-being
(e.g., persistent health)
```
177
What is the PERMA model?
- Five factors essential for well-being:
• Positive emotions (P): good feelings, optimism
• Engagement (E): being absorbed by an activity, flow
• Close relations (R): connectedness, love
• Meaning (M): Purpose
• Accomplishment (A): achievement of goals, fulfilment
- Five critical areas
• Career well-being
• Social well-being
• Financial well-being
• Physical well-being
• Community well-being
178
What is a time-sample diary?
* A diary method where respondents report at specific times on their current experience (e.g., well-being)
* Diary entries are scheduled to be made at random predetermined times, several times a day, over a longer period of time
* Often includes potential determinants of well-being (e.g., objective situation, subjective causes)
179
What is the day reconstruction method?
• Respondents to review their day and report their experiences (e.g., well-being) during parts of the day
180
What is dailey hassles?
• Events that occur on a day-to-day basis and by themselves only produce minor stress, but cumulatively impact well-being
181
What is flow?
* The feeling of being completely absorbed in an activity
| * Is possible when capabilities and difficulty of assignments are equally high
182
What is resigned satisfaction?
results from lowering one’s aspirations after initial dissatisfaction
183
What is hedonic treadmill?
• A model of subjective well-being that assumes that people quickly adapt to changed circumstances and after a short while are just as happy as before
184
What is self-determination theory?
* Autonomy, competence and relatedness (i.e., social relationships) are fundamental psychological needs
* Their fulfilment leads to greater well-being
185
What is the easterlin paradox?
- Although on average richer people in a country are happier than poorer people, happiness in a country remains the same despite growth in material prosperity
186
What is conceptual-referent theory of happiness?
* People have different definitions of subjective well-being, and evaluate their lives according to their own understanding of subjective well-being
* Two opposing attitudes: seeing either external or internal factors as important for happiness
* For people with external orientation, income plays an important role
* For people with internal orientation, money has little to do with happiness; instead: self-acceptance, belonging, emotional security
187
What is critique of Easterlin?
- Easterlin (1974): “no correlation between a country’s wealth and happiness”; conclusion: “only relative income matters”
- Veenhoven (1984): sharp critique
• Easterlin’s conclusion implies that even people battling famine could feel happy as long as everyone else is in the same position
• Reflects an ignorance of third-world poverty that does not hold up empirically: studies show that with increasing GDP, happiness increases but the increase slows down if GDP reaches high level
188
What are the functions of social representations?
- Main function: make new phenomena understandable and usable in everyday discourse
- Additional functions:
• Selective function: distinguish between own social group and others
• Justificatory function: stereotypes about social classes justify economic differentiation
• Anticipatory function: interaction patterns between groups can be anticipated
• Attributional function: provide explanation of social behaviour
• Social identity function: provide social identity, how people see themselves as part of a group
189
How does the meaning of money depend on the context?
* “monetary markets” versus “social markets”: depending on the situation, money is a suitable medium of exchange or not
* “sacred usage”: in some situations, money has moral, near-religious connotations
* “taboo trade-offs”: in some situations, even considering money as a medium of exchange is morally offensive
190
What is the operant conditioning theory?
* The probability of a behaviour is increased by rewarding stimuli (reinforcers) following that behaviour
* Primary reinforces are rewarding in themselves
* Secondary reinforcers have acquired a reward quality through learning processes
191
What are windfall gains?
unexpected gains treated differently than expected gains, e.g., spent more easily and invested more riskily than money that was earned through hard work
192
What is money illusion?
* Perceived economic value of money amounts is influenced by the units in which they are represented
* Nominal values are given too much weight, real values too little
193
What is euro illusion?
• Specific form of money illusion
• Perception of prices in euro influenced by the respective original currency and the corresponding exchange rates
- Euro illusion assumed to increase unwanted spending because the small nominal prices would be perceived as ‘good deals’
- Only mixed results for a general euro illusion, but some moderators
• Euro illusion smaller among euro opponents
• Euro illusion smaller for familiar products
• Euro illusion larger when cognitive processing capacity was limited
194
What are the types of information search?
• Pre-purchase search
-> Driven by involvement in the purchase
-> Motivated by wish to make better purchase decisions
• Ongoing search
-> Driven by involvement in the product or product category
-> Motivated by wish to build up information for future use or by experiencing fun and pleasure
-> Can contribute to unplanned spending and compulsive buying
