Lecture 5: Alternative Models of Choice

Question 1

opportunity cost

Answer 1

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

Question 2

money should be fungible

Answer 2

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

Question 3

mental accounting

Answer 3

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

Question 4

mental account types

Answer 4

• minimal account
• topical account
• comprehensive account

Question 5

minimal account

Answer 5

looks at just the direct costs and benefits of a decision without considering any other context

Question 6

topical account

Answer 6

considers the decision in relation to a specific category or situation

Question 7

comprehensive account

Answer 7

evaluates the decision based on overall resources, priorities, and goals

Question 8

hedonic editing

Answer 8

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

Question 9

mental accounting & gains and losses

Answer 9

• gains: segregate
• losses: integrate
• mixed (gains): integrate
• mixed (losses): depends (losses much larger than gains: segregate) vs (losses only slightly larger than gains: integrate)

Question 10

mental accounting & transactions evaluation

Answer 10

• 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?)

Question 11

why we use mental accounting

Answer 11

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

Question 12

reason based models

Answer 12

• fits how we normally talk about decisions
• helps us to understand conflict
• allows for comparative considerations

Question 13

choice between equally attractive options

Answer 13

people choose the alternative that is higher on the aspect they consider more important

Question 14

choosing vs rejecting

Answer 14

positive features of options will loom larger when choosing, negative features of options will be weighted more heavily when rejecting

Question 15

impoverished vs enriched option

Answer 15

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)

Question 16

principle of procedure invariance

Answer 16

a basic assumption in rational theory
- equivalent methods of elicitation yield identical preferences

Question 17

choose-reject discrepancy is not consistent with procedure invariance

Answer 17

• 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

Question 18

choice under conflict: seeking options

Answer 18

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

Question 19

choice under conflict: adding options

Answer 19

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

Question 20

asymmetric dominance effect/decoy effect

Answer 20

occurs when the presence of a less desirable “decoy” option makes one of the other options appear more attractive, influencing decision-making

Question 21

the compromise effect

Answer 21

when an option is added to make the middle option the most attractive

Question 22

definite vs disjunctive reasons

Answer 22

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

Question 23

formal modeling approach

Answer 23

associates a numerical value with each alternative, and characterizes choice as the maximization of value

Question 24

reason-based analysis

Answer 24

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

Question 25

situations of dominance

Answer 25

there are clear and indisputable reasons for choosing one option over another
- reduces the tempation to look for additional alternatives

Question 26

tradeoff contrast (Simonson and Tversky)

Answer 26

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

Question 27

extremeness aversion

Answer 27

refers to the finding that within an offered set, options with extreme values are relatively less attractive than options with intermediate values

Question 28

weakness of disjunctive reasons

Answer 28

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

Question 29

purported reasons for choosing an option

Answer 29

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

Question 30

acquisition utility

Answer 30

depends on the value of the good received compared to the outlay

Question 31

transaction utility

Answer 31

depends solely on the perceived merits of the ‘deal’

Question 32

local temporal budget constraints

Answer 32

the budget constraint that most influences behavior is the current income flow rather than the present value of lifetime wealth

Question 33

methods of raising price

Answer 33

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)

Question 34

suggested retail price

Answer 34

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

Question 35

budgetary rules

Answer 35

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)