MT Readings Flashcards
What paper is associated with topic 1.1 and who is it by?
Anomalies: Preference Reversals by Tversky and Thaler 1990
What does the introduction of Tversky & Thaler(1990) paper say about consumer theory?
Consumer theory assumes decision makers have stable well defined preferences and make rational decisions. Hence all the modern microeconomic assumptions hold e.g. continuity, transitivity, non-saitation, convexity and completeness. We can derive utility functions which are ordinal, helping us to order preferences.
What does Tversky & Thaler(1990) paper say about consumer theory that says in fact decision making is not rational( key term) and why is it an anaomalie.
Decision makers make decisions that contradict each other( assumptions contradict each other) , . This is called preference reserval. It is an anomaly because its a violation of the assumptions e.g. transivity etc. and goes against rationality.
What is procedural invariance according to Tversky and Thaler (1990) ?
Because preferences are stable, the different ways you answer questions, should change your preference ordering.
According to Tversky and Thaler(1990) why might preference reversals happen be linked to Procedural invariance?
It is linked to a violation of procedural invariance. Asking people questions about their preferences in different ways can lead to contradictory answers ( peoples rational are fragile to different things )
What was the experiment Tversky and Thaler (1990) did as the main emphasis of their paper just describe it Part A.
There are 2 programs which are designed to reduce traffic accidents in the country. At the time of this policy making, about 600 people per year are killed in traffic accidents in that country.
1) First program: Reduces casualities to 570 and costs £12 million
2) Second program: Reduces casualities to 500 and costs £55 million
So people are polled via polling organisations, to ask see which one was better. Results found that 2/3 of people preferred B as it reduces more lives, even though it is higher cost per life saved.
What was the experiment Tversky and Thaler (1990) did as the main emphasis of their paper just describe it Part B?
They also hired a matching firm where this time they don’t give the cost of program B, but lets make a fake C, but ask the question what cost would make A as attractive as B( we know what B was before. ( we can right this
Program A) Causalities reduced to 570 that cost £12 million
Program B) Causalities reduced to 500 that cost £55 million
Program C) casualities reduced to 500 that costs X.
If you chose Program A in the first round. This means you prefer A to B which was 1/3. the cost that would make them indifferent between A and B, would be a cost < 55 mil. You expect exactly 1/3 of people to say a cost <55.
IF you chose program B in the first round. This means you prefer B to A, which was 2/3. the cost that would make you indifferent between A and B would be a cost > 55 mil. You’d expect exactly 2/3 of people to say a cost > 55.
more than 90 percent of the respondents provided values smaller than $55 million indicating, in effect, that they prefer Program A over Program B.
These results are inconsistent.
Why did this result occur according to Tversky and Thaler (1990) 3 possible explanations but we think of 2.
1) Failure of transitvity assumption ( people make choices that are inconsistent, hence don’t really understand preferences, we cant derive a ultity function and order preferences.
2) Failure of the procedural invariance - the way we ask questions alter the answer. (People might over-price or under-price different options depending on how the question is posed. Why? If you ask a question about costs in pounds, then this might become more salient and people focus on monetary outcomes. While if you instead focus on non-monetary attributes then people place less emphasis on cost.
Who where the Writerrs who said that only 10% of people were intransitive?
Tversky, Slovic and kahernamn (1990) found that 10% of people were intransitive, so really procedural invariance is just violated.
What is the implication for consumer decision making according from Thaler and Tversky (1990)?
1) Context and procedures involved in making choices or judgements actually influence preferences. This links to the idea of framing ( present same thing in a different way e.g. saving lives rather than losing lives, its the same thing presented in another way).
b) Will is a theatregoer who can choose to see a musical for £80 or a drama for £60 in his local theatre. He buys a ticket for the musical. He is later contacted to complete a survey which asks at what price he would have been indifferent between the musical at £80 and the drama. Will indicates he would have been indifferent at £70. Are Will’s decisions consistent with consumer theory? If not, briefly explain what could explain his behaviour?
TBA.
What is the next paper that relates to topic 1.2?
The maxmization paradox Dar - Nimroad et al (2009)
What is the main message of the maximisation paradox?
Contrary to the common belief that more options lead to better decisions, recent research has demonstrated that choosing from a large number of options can have detrimental psychological effects and less utility.
In consumer theory we assume that consumers want to maxmise utility, if we had a utility function with 2 flavours of ice cream and prices and income are known and we add another 25 flavours prices are the same income don’t change, would adding this choice ever make us worse off in our model? So
Not in our model, adding choice only expands options available, but we still have original choices we had from the start, so we can still choose what we were choosing b4, so cannot be worse off, providing the 2 flavours are still available. Expanding choose must be good as we can get on a higher IC.
Dar-Nimrod et al(2009) distinguishues between two types of decision-makers, which are what and how are they different?
‘‘maximizers”were more willing to sacrifice resources such as time to attain a larger choice array. ( same as what economists say people are)
satisficisers - describes the tendency to approach choices with the goal of finding an option that is ‘‘good enough” according to their threshold of
acceptability.
So maxmisers love choice whereas satisficers do don’t.
Describe the ice cream study Dar-Nimrod et al (2009) did ( BTW they did 3 chocolate study also another. )
Ice cream study. There are 2 ice cream parlours. one with approximately 200 flavours ( larger parlour) and the other offers approximately 20 flavours( smaller parlour) . They are both equally priced. But the one with the 200 flavours is further away, whereas the one with 20 flavours is close.
What was the result of the Dar-Nimrod et al( 2009) study?
They asked satisficers and maxmisers how satisficed are you with ice cream from the different parlours. The maxmisers that chose to go to the shop with many choices, are less happy than the satisficers ( satisficers do sometimes go the shop with many choices. They also found the maxmisers were more likely to walk further or travel further, take time and effort, in the hope of doing better. Satisficers were content on the closer ice cream parlour with 20 flavours.
What does the ice cream study by Dar-Nimrod et (2009) reveal?
Maxmisers, who take an action to try and improve their utility buy visiting ice cream parlour further down with 200 flavours, turn out worse off than if they just be content with the 20 flavours.
HENCE THEIR IS A MAXMIZATION PARADOX.
What are the reasons for this maxmization paradox in the paper? ( the paper speculates on them.
1) The maxmisers here that the 200 flavours and get exicted but in reality it is variations of the same thing e.g. dark choco chip, light choco chip. ( too high expectations ( we cant be happy if we are striving for better every day)
2) didn’t factor in cost correctly.
What do maxmisers also get after going to larger ice cream parlours Dar-Nimrod et study? What study have we learnt in 1.7 which could link here?
They regret there choice ( think possibly here about decision and experience utility)
How can this paper link of maximisation paradox to education?
Maxmisers and sacrificers who want to go to unis.
Maxmisers more likely to research and travel far to go to top unis.
Satisficers are more likely not to do that much research and go to the closest uni, not caring about the level of it.
Maxmisers tend to go top unis but are less satisfied, and would be just as satisfied if they went to a uni just as good as were the majority of satisficers go.
A lot of these studies about paradoxical behaviour include consumers having a feeling of regret, is regret consistent with our model?
No because people are meant to be maximising their utility and choosing the right choice. The only way they could experience regret is if they couldn’t anticipate how they contrast bundles, the assumption of completeness would be failed( the idea we can accurately rank different bundles and optimise on that knowledge)
So if preferences are complete should people experience regret in our consumer model?
No
How do you answer this?
Identity reading
Some students satisficers and some are maxmisers
Regret links to the maximisation paradox and link this to the completeness assumption in consumer theory and say this cannot be consistent with consumer theory onlyl if completeness doesn’t hold.
A convenient truth”: air travel passengers’ willingness to pay to offset their CO2 emissions Brower et al ( 2008) What were the key findings of the WTP of different conuntires?
In the Case study Virgin Atlantic and British Airways Luis Cabral(2007) there is this table which shows the leniency program in different regions when nothing is suspected ( but they just receive a email or phone call about whats going on)
?1) Analysis this? 2) Why is their a discount for the second and third for Europe and Asia? 3)Which region gives strongest incentive to deviate?
In every scheme you get a 100% penalty reduction for the first person who owns up.
Differences is if you are in the US you don’t get any penalty reduction if you are the 2nd -4th person or how many people there are.
But in Europe and Japan there are incentives for more firms to come forward, 2nd to 4th or whatever can get a penalty reduction.
2) you get more evidence to prosecute ( because the evidence in first might not be enough in court for conviction
3) US gives the strongest incentive to be first mover, thus stronger effect to destabilise the collusion.
In the Case study Virgin Atlantic and British Airways Luis Cabral(2007) lets say that these prosecutors already feel like some collusion is happening, what is the leniency scheme here show?
1) for the US, if you come out first you get 100% reduction in penalty, thus incentive strong.
2) in Europe and Japan as they have got some evidence of their own already penalty reductions are less and the information they provide, is less valuable.
