Lec 2

Question 1

Anchoring and adjustment
=> biases?

Answer 1

Make a judgment abt smth new => use a similar known case or experience as a reference
Adj: account for any differences

• if ur anchor was biased (the comparison) then it’s not accurate so the estimate could of off

Question 2

Watch demo

• 100 vs 3000 (leading question for anchoring bias)

What is the mechanism for why the 2 groups made 2 different average judgments?

What is the heuristic?

Answer 2

• a reference
• leading question become an anchor - the effects still showed up despite the same test last week
• by asking 100, it influences/suggests the references of cheaper watches (business acceptable, but not that expensive) that come to mind

Unconsciously accessing smth abt a previous experience for that judgment

Question 3

Price of annoyance
- no prev. Experience, do biases persist?

• what did they want to test?
• results?

Answer 3

• how much pay ppl to listen to unpleasant noises?

Wanted to test
- influence of anchors (90 vs 10 cents)
- coherence of relative judgments
- persistence of anchors

Results
- 10c would listen again on av for 30c, compared to 70c (anchor effect)
Suggests ppl didn’t hv a standard, so went with the anchor(suggestion)

New anchor: asked both groups 50c, their anchor persists as a reference , then 10c and 90c reversed as question

Question 4

After the 50c for Ariely’s study

Answer 4

10c: asked for a bit more as 50c implies they should ask for more
But not as high as 90c

90c: goes down a bit, does not change much for 10c

Initial anchor: does matter, bc if it didn’t, then each bar on the graph would match the anchor

Question 5

What did Starbucks do?
Case of black pearls

Answer 5

Establish a novel context (experience of their coffee shop) so you couldn’t compare their prices with other places

No market for black pearls: novel tho, so impression that high end could be created (high reference point)

Question 6

Anchor as human cognitive capability

Answer 6

We have a lot of experience, so connect the right ones

Question 7

Rational choice model

Answer 7

• a hypothetical model
• help ppl make decisions (risk and reward)
• pick the one with most expected utility maximization
• can explain some things
  But our ind differences eg how much we value smth affects that
  But this does not work for human judgments!

Question 8

Luce’s choice axiom (Economist example)

Answer 8

Rationally, if u had to pick between 2 options, should not depend on other options
each option has some utility value, eg online is more accessible

Might differ a lot or little between the choices, so choose the one with most utility

Sense of utility: implies there’s an order, so when u add C to A and B, unrelated options should not change the order

That is the ration choice axiom (ind from relevant alternatives)

Decoy effect violates this! C does change the ranking (P only)

The decoy gives an easy comparison

Question 9

Ariely: attractiveness

Answer 9

• perceive the option as more attractive when there is a decoy

Explanation: focus on relative judgments that is an easier comparison (a and b vs a and a-)

Question 10

The Free effect

Answer 10

• irrational bc the difference bet. Both chocolates is the same (14c) in both cases
• but free changes the chocolate preferences dramatically
• no need to weigh cost

Question 11

Seeking bargain
The pen vs the suit, save 60 dollars in both cases

Answer 11

Isn’t 60 dollars worth 15 mins of ur time? Same trade off but different baseline (irrational)

Larger price doesn’t feel that ur saving as much!
Relative saving perceived differently

Question 12

Subjective utility

Answer 12

• distortions: eg we treat the first step from 0 being a big one, then next is small
• we treat gains and losses differently