Lecture 1 Flashcards
The default effect
So look at the opt out opt in boxes. People more likely to leave them, so if a box is to opt out it’s more likely to be left and therefore people don’t check and join the promotion
Why are decisions often complex and difficult
Decisions are often complex and difficult because of limited knowledge/info, limited cognitive resources (time attention memory) and limited motivation
Heuristics
Heuristics are cognitive shortcuts to make decisions quickly and efficiently
Decoy effect
The decoy effect is the choice if one option over the other changes when a third - asymmetrically dominated - option is introduced
Asymmetrically dominated is inferior in all properties to one option, but only inferior in some properties to the other option (ie an irrelevant alternative)
Why does the decoy effect work?
Adding an irrelevant alternative helps consumers to decide > upselling.
Eg pricing of consumer electronic products (eg Apple) buying popcorn in cinema
So one small popcorn in £3 one tango blast is £5 both is £6 more likely to buy both cos the £5 is so ridiculous that the consumer
Anchoring and adjustment
Anchoring and adjustment is making an estimation based on a process of anchoring on a salient number and adjusting up or down
Problem tho is that adjustments are typically insufficient, estimation is based toward the anchor
Eg negotiations through wages, you get told a figure and then you negotiate from it
Price of a car then you negotiate from that
Mental accounting - what is it
Mental accounting is people keep track of their expenses in different mental accounts (ie categories). These mental accounts influence the decision making processes “a dollar is not always a dollar”
Eg:
Scenario 1: you’re in queue for ice cream. It’s £5: but you realise you dropped five at subway.
Scenario 2: you buy ice cream for five then drop it.
How likely are you to buy ice cream: more propel likely to buy scenario 1 than 2. Individuals spend money differently depending on the account they pay from
Availability
Availability heuristics is events that are judged more likely to the extent that they are vivid or easily recalled.
What is the relevance of availability heuristics
Availability heuristics relevance is ignoring relevant facts due to the vividness of recent examples: overestimation of the likelihood that something good or bad will happen eg seeing news (plane accident) lottery winners, sweepstakes
Representativeness heuristics
Representativeness heuristics means if it is representative it is likely. So when judging the probability that a belongs to b, people base their judgement on the degree to which a resembles b - and neglect the general probability of b
.if something is more representative, people tend to think it is more likely
.
Eg Linda is 31 single outspoken and very bright. She majored in philosophy. As a student she was deeply concerned with issues of discrimination and social justice, and also participated in anti nuclear demonstrations.
Is she more likely to be a
Bank teller
Or
Bank teller and active in the feminist movement.
People tend to choose b because of you he more information leads them to believe. But the answer is a as both have bank teller and one has more info
What are practical examples of representative heuristics
Practical examples of representative heuristics are Consumer judgments of product prices in supermarket vs discounted. Investment decisions based on success of representative company.
Framing effect
Framing effect is the frame of a message influences the decision I.e. people react differently depending On how.a message is presented
People prefer positive outcomes over negative outcomes
Eg would you rather out of 600’peiple fire 400 or save 200
Would you rather have a 90% chance of living or 10% chance to die
Prospect theory
Reference dependance = value is measured in gains and losses relative to a reference point
Diminishing sensitivity = marginal value of gains and losses decreases with their size
Loss aversion = losses look large than gains
Relevance to prospect Theory
Relevance to prospect theory is loss aversion. Loss aversion is potential losses motivate more than potential gains eg firing vs saving jobs, selling insurances. Losses make people risk seeking (gambling).
The ikea effect: effort increases love. The consumers place more value on products they have at least partially created. Relevance of this is integrati consumers in the production process increases valuation to customer. However too much effect can adverse effect like cake mix.
Key takeaways of lec 1
Decisions are often complex and difficult. To make decisions quickly and efficiently consumers use several heuristics. (Is cognitive shortcuts)
Heuristics can lead to systematic errors and biases, mistakes people repeat over and over again, (not always rational but predictably irrational)
In decision making we need to go beyond the standard economical mode of expected until it tax prospect theory provides a relevant framework.
Understanding both rational and irrational behaviour is important for consumers, managers and policy makers in financial decision making, hr management, product pricing, marketing strategy
