Lecture 2

Question 1

compromise effect

Answer 1

an option is chosen more often when it’s attributes are not the extremes

preferences are influenced by context

Question 2

attraction/decoy effect

Answer 2

option A is more strongly preferred over option B, when A obviously dominates the other option.

Question 3

Kahneman & Tversky

Answer 3

studied how people actually make decisions with integrating psychological principles
biases and heuristics

Question 4

biases

Answer 4

labels for behavior, not theories for explaining them
- endownment effect
- framing effect
- sunk-cost fallacy

Question 5

endownment effect

Answer 5

people value something more when they feel a sense of ownership.

for example test-driving, free return trials etc.

Question 6

framing effect

Answer 6

preferences can shift depending on how information is presented.

Question 7

sunk-cost fallacy

Answer 7

people will keep investing when they’ve already invested in something. because otherwise they will feel as if they wasted money.

Question 8

heuristics

Answer 8

• availability heuristics
• anchoring and adjustment
• mental accounting

Question 9

availability heuristics

Answer 9

people judge the likelihood of events by the ease with which they can generate an instance of that event.
from memory, imagine, generate examples, ability to visualise it.

Question 10

cognitive ease

Answer 10

people rely on things that come to mind easily

Question 11

anchoring and adjustment

Answer 11

people start from an initial value and then adjust up- or downwards. the adjustment is often insufficient and by manipulating the anchor final judgements can be manipulated.

Question 12

mental accounting

Answer 12

people put money in different accounts for different things, while it all has the same monetary value.

Question 13

prospect theory

Answer 13

theory about how people value losses and gains and think about probability

Question 14

3 aspects of the value function

Answer 14

1. reference point: everything is valued in comparison to some reference point. (no absolute value)
2. diminishing sensitivity (diminishing marginal returns)
3. loss function

Question 15

loss function

Answer 15

• loss function is steeper than gains
• people are more risk-seeking in the loss domain
• people avoid marking something down as a loss, sometimes at high cost.

Question 16

effects/biases in prospect theory

Answer 16

• disposition effect
• status quo bias
• end-of-the-day effect

Question 17

disposition effect

Answer 17

traders tend to sell winning stocks too early and hold on to losing stocks too long.
due to the reference point and tendency to seek risk under loss

Question 18

status quo bias

Answer 18

people tend to stick with the default/status quo, even if this was randomly determined

Question 19

end-of-the-day effect

Answer 19

as gamblers lose more money, they are more likely to bet on long-shots.
mixed evidence on taking more or less risk after loss.
- realized/money exchanged loss = more risk averse
- paper/not yet cashed out loss = more risk seeking

Question 20

probability weighting function

Answer 20

how we weight probability
- we overweight low probabilities
- underweight high probabilities

for example people play the lottery, but also take out insurance for rare events.

Question 21

certainty effect

p weighting

Answer 21

the (sometimes small) step from a high probability to certainty has a large psychological effect.

Question 22

nudging

Answer 22

changing the choice architecture that alters people’s behavior in a predictable way without forbidding options or significantly changing their economic incentives.

Question 23

problems with nudging

Answer 23

• limited acces to relevant information
• limited capacity to evaluate and compare options
• limited attention & self-control

Question 24

solutions for limited acces to relevant information

nudging limitations

Answer 24

decision information
- increase visibility
- make easier to interpret
- provide reference points

for example the nutri score instead of just the macro’s

Question 25

solutions for limited capacity to evaluate and compare options

limitations of nudging

Answer 25

decision structure
- use defaults
- remove effort
- structure and group to facilitate comparisons

for example independer; site to compare retirement options

Question 26

solutions to limited attention & self-control

limitations to nudging

Answer 26

decision assistence
- provide reminders
- facilitate commitment

for example running with a running club instead of going alone (planning)

Question 27

Mertens et al., (2023)

Answer 27

meta-analysis showed that nudges work, but not always.

Question 28

Johnson & Goldstein (2003)

Answer 28

nudges can have a large effects, but those effects are much smaller in the real world and there are individual differences in how nudgeable someone is.

Question 29

debate on nudges?

Answer 29

nudges are sometimes cheap and easy, but require testing, because they might backfire.
also debate on if they preserve decision autonomy. who decides what to push for that should make people better of and which goals are reasonable or not to push for.