Lec 5 Flashcards
Dilemma
Group A: “save” 200 ppl => choose the treatment A
Group B: “400 ppl will die” => choose the 1/3 chance (treatment B)
Why is this irrational? What effects / heuristics?
“Save” =>certain gain
Willing to accept risk to avoid loss (Group B)
=> the situation is the same in both groups, only how they are framed
=> framing effect
- framing as losses vs gain!
Manipulate as imagined reference
Framing as gain vs loss
Gain = certain (we prefer this)
Loss (risky) prefer the riskier option to avoid a certain loss
Biases in decision-making:
Evaluating risk/reward
Avoiding risk > gain
This is loss aversion (work to avoid loss over an equivalent gain)
PPl are biased to go for the certain thing
Maximizing utility
How to make the best decision in risk reward?
What is the “best” decision to you
- utility function (assign value to any possible outcome)
- estimate the gain or loss on average of each choice (define rational choice w/ higher utility)
Subjective utility is biased tho
Subjective value and loss aversion
Properties of loss aversion and diminishing incremental value
=> ppl might differ in how much money means to them
=>avoiding loss is important eg retirement age (investment would be way more risky)
Treating a loss and gain differently can end up w/ irrational things bc it would be relative to an imagined standard, not the current one
Where is the reference? Arbitrary?
whichwould are u more likely to choose
Gambling:
Withdraw 1,000 => 10,000 => accept bet of of 5000?
Start with 10.000 => accept 5,000 bet?
Feels different, already.
Difference in imagined reference. How do you look at it?
More likely to choose the bet in the first situation
=> House money, which is a reduced gain
Winning 5000 or losing 5000 is risky => not attractive option (bias against)
Loss aversion and ownership
- frames how we think abt what we have and what we own
- the moment we own smth, how we think abt it changes in terms of gains and losses
=> losses are more salient than gains
Endowment effect
Once ownership has been formed, it affects our preferences
(More reluctant to give up the item)
Duke basketball
-what did the ticket owners do?
Ticket owners increased the price dramatically (over priced)
Duke explanations
- how would different factors affect their decisions (hypotheticals)?
- they focused on potential loss (eg the experience)
Loss aversion
Losses are perceived about 2.5 times more powerful than gains, despite 2% gain in stock and 2% loss in stock
(Not just around the zero on the graph, but where you are)
Recovering losses
- lose 4000 of the 5000
- do u gamble with the remaining 1000 to earn what you have lost??
Likely you’d probably keep playing
=> arbitrary
- the reference u choose is making a difference
LOSS AVERSION of back to original point
Sunk costs
- expensive uncomfortable pair of shoes
- u still don’t throw me away LOSS AVERSION
- bc throwing them away means u accept the sure loss
Sunk costs
- randomly allocated
- gave some ppl discounts
- some had to pay the original (expensive) price
The higher price => higher attendance price
- Sunk costs: can’t get it back
- if u paid the season ticket, that money is already spent
- so why does price matter when deciding whether to attend or not?
=> feel obligated “money’s worth” to avoid larger sunk cost
Evaluation of prospects
- ppl show predictable tendencies when making decisions under uncertainty
- loss aversion
- risk aversion for gains, but not losses
Depends on how it is perceived:
- framing effect
- endowment effect
- sunk costs
