Social Psychology And Economic Behavior: Heuristics And Biases In Decision Making Judgement Flashcards
Pursuit of pleasure iland the avoidance of pain explain all human behavior
Hedonic Utility
Computation of utility as the net balance of pleasure and pain.
Hedonic calculus
Who criticized the approach of hedonic calculus?
William James, 1890
Two types of utility
Ordinal and Cardinal Utility
It is easier to measure because it is based on ranking options.
Oridnal utility
It is based on rating options on a utility scale
Cardinal Utility
It was the dominant theory of decision making.
Subjective expected utility (SEU)
It deviates from the common rule or regularity
Anomalies
are relative concepts and are evaluated from a reference point.
Gains and losses
Receiving an unexpected inheritance (windfall income) will be regarded as a
gain
Not receiving an end-of-the-year bonus may be considered a
loss
losses are more painful than gains are pleasurable.
Prospect theory
the attractiveness of an alternative depends on the final outcome.
utility theory
care about changes in outcomes and about the final outcomes themselves.
Decision makers
They show that a negative framing of a problem (in terms of losses and victims) gives other reactions than a positive framing.
Tversky and Kahneman (1981)
In this, people are more willing to accept a risk to avoid a loss than (in positive framing) to get an equivalent gain.
negative framing
is the comparison of one’s present welfare with welfare in the past.
Personal reference
developed the welfare function of income. In this research, people answer questions such as ‘Which income level do you consider to be sufficient for yourself?’ They assign income levels to evaluations such as ‘excellent’, ‘sufficient’, ‘insufficient’ and ‘poor’.
Van Praag (1971)
- adapts their consumption level to the new reference point.
Preference shift
continuously changing preferences and satisfactions.
Hedonic treadmill
is the comparison of one’s personal welfare with the welfare of relevant others.
Social reference
- people compare their job and their income with the jobs and incomes of other people. If their friends or colleagues earn more with similar jobs, people get dissatisfied with their income.
Reference shift
a selfless concern and behavior to improve the welfare of others.
Altruism
- people show altruistic behavior in their donations to charities and their allocation of money.
Ultimatum game
They summarize these fairness judgements by the principle of dual entitlement. Consumers have the entitlement (right) to the terms of reference transactions using historical market prices and posted prices.
Kahneman, Knetsch and Thaler (1986)
seems to be a basic motivation of people. Neurologists claim that a potential loss activates the amygdala part of the brain. This part of the brain is the activation centre for danger. is the basic characteristic of prospect theory.
Loss aversion
Investors don’t like to sell their stocks with a loss. Investors keep their losing stocks too long, hoping that the value will increase.
Disposition effect
Survival frame
positive framing
Morality frame
Negative framing
- is the tendency of individuals to increase the value for themselves and others by integrating and segregating gains and losses.
Hedonic framing
means here that the gains and losses are given or told at the same occasion without a time interval for the recipient to adapt to a new reference point, for instance a loss and a gain on the same day (same time without interval, short period, same day, below two weeks).
Integration
means here that the gains and losses are given or told with a time interval long enough for the recipient to adapt to a new reference point. (naka adjust sa new reference point).
Segregation
four cases of hedonic framing:
Segregation of gains, Integration of losses, integration of a loss with a larger gain, Segregation of a gain from a lager loss
According to prospect theory, an integrated gain has a smaller positive utility (value) than two or more separate gains.
Segregation of gains
shorter time interval. People prefer to receive one credit card statement of payments rather than separate statements for each payment
Integration of losses
The recommendation is thus to inform people about a loss in combination with informing them about a larger gain. People will be less upset about the loss if the loss is perceived as a diminished gain.
Integration of a loss with a larger gain
- The recommendation is to facilitate the acceptance of a loss by also telling people separately about a smaller gain. This effect is also called ‘silver lining’, referring the silver line of the sun (good news) behind a cloud of heavy rain (bad news). The rules and recommendations of hedonic framing provide an interesting description of how people would like to see the world be organized, trying to increase their positive utility/value and to decrease their negative utility/value.
Segregation of a gain from a larger loss
- the effect of keeping what you have
Endowment effect
If offered a number of options, most people prefer the standard or default option or the option they already possess.
Status-quo bias
are the costs already invested in a project (account). Later we may discover that project is less likely to be successful, for instance because a competitor comes on the market with a superior product.
Sunk costs
There is a clear distinction in this title between people who are impatient and impulsive in spending their money and those who are less impatient and invest their money.
Time preference
Gains are discounted more than losses. People want more compensation (WTA) for delaying a gain than they are willing to pay (WTP) for delaying a loss.
Sign effect
small sums of money are discounted more than large sums of money. People want relatively more compensation (WTA) for delaying a small than a large sum of money.
Magnitude effect
Delay-speed-up asymmetry- People want more compensation (WTA) for delaying a gain than they are willing to pay (WTP) for speeding it up. People want more compensation (WTA) for speeding up a loss than they are willing to pay (WTP) for delaying it.
Delay-speed-up asymmetry
- People prefer this with an increasing utility over deteriorating sequences with a decreasing utility. Duties first and then pleasure. Consumers want to take the regular restaurant first and then the best restaurant (savoring).
Improving sequences
What are the 4 effects of time preference?
Sign effect, magnitude effect, delayed speed up asymmetry, improving sequences
