Lecture 2 Flashcards
Principles of Rational Choice Theory
People…
- Have well-defined preferences
- Process all information
- Weigh the relevant information
- Consistenly choose what satisfies their preferences
Compromise effect
Middle option is chosen more often
Attraction/decoy effect
The option that dominates is chosen more often
Endowment effect
People value something more when they feel a sense of ownership
Framing effect
Preferences can shift depending on how information is presented
Sunk-cost fallacy
Investing money or effort into something, because some amount of money or effort was already invested
Availability heuristic
people judge the likelihood of events by the ease with which they can generate an instance of that event
Anchoring and adjustment
People start from an anchor, then adjust upwards or downwards
Mental accounting
You put money into different ‘accounts’
Diminishing sensitivity
From 0 to 1 million increases happiness more than from 1 to 2 million
Loss aversion
The loss function is steeper
Disposition effect
Traders tend to sell winning sticks too early and hold onto losing stocks too long
Status quo bias
people tend to stick with status quo, even when it’s random
End-of-the-day effect
As gamblers lose more money, they’re more likely to bet on long-shots
Certainty effect
The step from a high probability to certainty has a large psychological effect
