non standard beliefs Flashcards
What is projection bias in behavioural economics?
Projection bias is the tendency to overpredict the extent to which future preferences will align with current preferences, leading to poor intertemporal decisions.
Give an example of projection bias using snack choices.
Office workers choosing snacks for the future preferred unhealthy snacks more when hungry than when satiated, showing they projected their current hunger into future preferences.
What did Conlin, O’Donoghue, and Vogelsang (2007) find in their study on catalogue orders?
They found that lower order-date temperatures increased the likelihood of returning cold-weather items, supporting projection bias. Buyers overvalued items during cold weather.
What is the Law of Small Numbers and how does it relate to the Gambler’s Fallacy?
The Law of Small Numbers is the mistaken belief that small samples must reflect the properties of the larger population. This underlies the Gambler’s Fallacy—expecting reversals after short streaks.
Explain the Gambler’s Fallacy using a coin toss example.
After several heads in a fair coin toss, individuals incorrectly believe tails is more likely next. A rational person knows the probability remains 0.5 each time.
How does belief in a small urn size explain the Gambler’s Fallacy? (Rabin, 2002)
People act as if outcomes are drawn without replacement from a finite urn, so repeated outcomes lower perceived probability of repetition, leading to biased expectations.
What is overinference and how is it different from the Gambler’s Fallacy?
Overinference is when individuals draw too strong conclusions from small samples. Unlike the Gambler’s Fallacy, it leads to expecting trends to continue (e.g., Hot Hand Effect).
Give an example of overinference in investment behaviour.
Investors seeing consistent gains in a fund may infer the manager is highly skilled, even if the sample is too small, leading to overinvestment and potential disappointment.
How does overinference explain the ‘Hot Hand’ fallacy?
After a string of successes, individuals incorrectly believe that the trend will continue, due to overinterpreting random streaks as skill or signal of a pattern.
What is overconfidence in behavioural economics?
Overconfidence refers to people’s overestimation of their own abilities, knowledge, or control, often leading to suboptimal decisions like excess market entry or poor self-control.
What are common examples of overconfidence in consumer behaviour?
Consumers overestimate their self-control: overspending on credit cards (Ausubel, 1999), under-saving for retirement (Madrian & O’Shea, 2001), and overcommitting to gym contracts (DellaVigna & Malmendier, 2006).
What did Camerer & Lovallo (1999) show about overconfidence in firm behaviour?
In lab experiments on market entry, participants believed they would outperform others despite expecting overall losses—demonstrating overconfidence and competition neglect.
