Lecture 5: Alternative Models of Choice Flashcards
opportunity cost
the psychological factors and trade-offs involved when making decisions, particularly the value of the next best alternative that is forgone when a choice is made
- not only money but also resources
money should be fungible
a central assumption in the theory of consumer choice is the fungibility of money
- any unity of money is substitutable for another
- units of money don’t have unique attributes; they are all the same
- unique to money
mental accounting
describes the ways ordinary people think about money
- Kahneman and Tversky introduced psychological accounting
- Thaler uses mental accounting to describe mental representations and cognitive processes related to transactions involving money
mental account types
- minimal account
- topical account
- comprehensive account
minimal account
looks at just the direct costs and benefits of a decision without considering any other context
topical account
considers the decision in relation to a specific category or situation
comprehensive account
evaluates the decision based on overall resources, priorities, and goals
hedonic editing
people try to maximize happiness (where gains = pleasure; losses = pain)
- people use mental accounting to categorize money and hedonic editing to arrange these categories for maximum happiness
mental accounting & gains and losses
- gains: segregate
- losses: integrate
- mixed (gains): integrate
- mixed (losses): depends (losses much larger than gains: segregate) vs (losses only slightly larger than gains: integrate)
mental accounting & transactions evaluation
- acquisition utility: value of a good relative to its price
- transaction utility: perceived value of the deal (does the price seem fair in relation to a reference point?)
why we use mental accounting
self-control
- saving money is difficult
- overspending is easy
- controlling impulses is difficult, and ‘putting’ money/resources in different ‘buckets’ helps us to overcome the temptation and have more self control
reason based models
- fits how we normally talk about decisions
- helps us to understand conflict
- allows for comparative considerations
choice between equally attractive options
people choose the alternative that is higher on the aspect they consider more important
choosing vs rejecting
positive features of options will loom larger when choosing, negative features of options will be weighted more heavily when rejecting
impoverished vs enriched option
impoverished option
- fewer positive and fewer negative features
enriched
- more positive and more negative features
- the enriched option could be both chosen and rejected when compared to an impoverished option (parent A vs B custody of child)
principle of procedure invariance
a basic assumption in rational theory
- equivalent methods of elicitation yield identical preferences
choose-reject discrepancy is not consistent with procedure invariance
- the discrepancy is easily understood from a reason-based choice perspective
- reasons for choosing are more compelling when we choose than when we reject
- reasons for rejecting are more compelling when we reject than when we choose
choice under conflict: seeking options
choosing often creates conflict as we are unsure which attributes matter to us or how to trade them off
- to solve it, we often seek reasons for choosing one option over another
- when choice is very hard, we might seek additional options, or to maintain the status quo
- the harder the choice, the more likely we are to search for new options
- a good reason for choosing an option reduces the temptation to seek more options
choice under conflict: adding options
a principle of independence of irrelevant alternatives
- preference ordering between 2 options should not be altered by the introduction of additional alternatives
- thinking about people’s decisions in terms of reason-based choices reasons helps to explain violations of the principle of independence of irrelevant alternatives
asymmetric dominance effect/decoy effect
occurs when the presence of a less desirable “decoy” option makes one of the other options appear more attractive, influencing decision-making
the compromise effect
when an option is added to make the middle option the most attractive
definite vs disjunctive reasons
once the outcome of the exam is known, the student has good although different reasons for taking the trip
- pass -> reward
- fail -> consolation and time to recuperate before a resit
- but when there is no result, there is no good reason to take the vacation
formal modeling approach
associates a numerical value with each alternative, and characterizes choice as the maximization of value
reason-based analysis
identifies various reasons and arguments that are purported to enter into and influence decision, and explains choice in terms of the balance of reasons for and against the various alternatives
situations of dominance
there are clear and indisputable reasons for choosing one option over another
- reduces the tempation to look for additional alternatives
tradeoff contrast (Simonson and Tversky)
the tendency to prefer an alternative is enhanced or hindered depending on whether the tradeoffs within the set under consideration are favorable or unfavorable to the alternative
extremeness aversion
refers to the finding that within an offered set, options with extreme values are relatively less attractive than options with intermediate values
weakness of disjunctive reasons
a number of studies contrast people’s willingness to reach a decision based on a definite reason for choice, with their reluctance to arrive at a decision in the presence of uncertainty about which reason is actually relevant to the case at hand
purported reasons for choosing an option
the addition of purported reasons for choosing an option is seen to diminish the tendency for people to opt for that option, even though its value is not diminished
acquisition utility
depends on the value of the good received compared to the outlay
transaction utility
depends solely on the perceived merits of the ‘deal’
local temporal budget constraints
the budget constraint that most influences behavior is the current income flow rather than the present value of lifetime wealth
methods of raising price
steps can be taken to increase the perceived reference price
- explicitly suggest a high reference price
- increase the perceived cost of the product
- increase the minimum purchase required and/or to tie the sale of the product to something else
- make the transaction disutility less salient (sell the product in an unusual size or format)
suggested retail price
in some cases SRP is equal to market price, in others, SRP exceeds the market price by as much as 100% or more
- a lower selling price will provide positive transaction utility
- inexperienced buyers may use the SRP as an index of quality
budgetary rules
refers to how people mentally allocate their money into different “mental accounts,” which they use to guide their spending and decision-making. These accounts might be based on categories like necessities, entertainment, or savings. Once money is assigned to a particular account, people tend to spend it only within that category, even though money is fungible (interchangeable)
