Module 2

Question 1

Framing effect

Answer 1

Whether an option is presented as a loss (negative) or a gain (positive). People are generally biased toward picking an option they view as a gain over one they view as a loss, even if both options lead to the same result.

Example: Both cost and weigh exactly the same. One is labeled “80% lean” and the other “20% fat.” Comparing the two, you feel that 20% fat sounds like an unhealthy option, so you choose the 80% lean option.

Question 2

Prospect theory

Answer 2

when people like risk vs when people don’t like risk
- Value function (how people compute utilities):
Three theoretical propositions:
1. Reference dependence
2. Loss aversion
3. Diminishing sensitivity

Question 3

Narrow framing

Answer 3

Narrow framing causes you to focus so much on the immediate choices that you miss other options.

Question 4

Attribute substitution

Answer 4

When people make a judgment that requires the use of a target attribute, but make the judgment using a heuristic attribute that comes more readily to mind

Example: someone who has been thinking about their love life who is then asked about their happiness might substitute how happy they are with their love life rather than answer the question as asked.

Question 5

Affect heuristic

Answer 5

When we subconsciously let these feelings guide our decisions, we rely on the affect heuristic.

Question 6

Reference dependence

Answer 6

Outcomes are coded as either gains or losses relative to a reference point.

Question 7

Endowment effect

Answer 7

How people tend to value items that they own more highly than they would if they did not belong to them. This means that sellers often try to charge more for an item than it would cost elsewhere.

Question 8

Diminishing sensitivity

Answer 8

Diminishing sensitivity implies that low probabilities are typically given more weight than they would receive using expected utility. This overweighting is consistent with risk seeking for low probability gains (such as lottery tickets) and risk aversion for low probability losses (such as insurance).
> Earning 10 twice is better than earning 20 once
> Losing 10 twice is worse than losing 20 once
> Separate gains, integrate losses

Question 9

Probability weighting

Answer 9

The tendency for individuals to over-weight low probability events, while also under-weighting high probability outcomes.