Topic 1 - Part 2: Decision Making Under Certainty Flashcards
Standard theory assumes that utility comes from ….. ……….. and people make choices based on these utilities
final outcomes
There is evidence that choices may be affected by
a reference point.
What is a a reference point?
There are many possibilities:
I What you currently have
I What you get if you do nothing
I What you expect
low volume of trade is produced
mainly by owner’s reluctance to part with their ……….
Endowment
WTP
Willingness to Pay
WTA
Willingness to Accept
- the minimum compensation demanded
endowment effect
The reluctance of people to part from assets that
belong to their endowment
We can say that we observe an endowment effect when
……… prices (Pb) are significantly lower than ……. prices
(Ps)
buying/selling
Loss aversion
refers to the fact that people dislike losses
more than they like gains of a similar size
Sunk costs
costs beyond recovery at the time when the
decision is made.
Economic theory implies that only ……….. costs and
benefits should affect decisions. Sunk (historical) costs
should be irrelevant
incremental
In business terms, sunk cost fallacy means continuing with
a project because of the time, effort and, money already
invested rather than looking at the ….. and ……… from
where we are today.
costs and benefits
Standart theory assumes that choices are made to equate
marginal costs with ……….. …………
marginal benefits
The standard economic prediction is that a temporary
increase in wages should cause people to work …….. hours
due to the assumption that workers substitute labor and
leisure intertemporally, working more when wages are high
and consuming more leisure when the foregone wage is low.
longer or more
According to Thaler, we use ……. ………. to organise
and run our lives.
E.g., we hold our money in different accounts, sometimes
physical, sometimes only mental (such as spending money,
general savings, savings for children’s education, for
medical emergencies etc).
mental accounts
People sometimes evaluate outcomes separately (…….. ………… of mental accounts). A cab driver taking a
one-day horizon is an example of ………. …………..
narrow bracketing
A rational agent would have a comprehensive view of the
portfolio and sell the stock that is ….. likely to do well in
the future, without considering whether it is a winner or a
loser.
least
Status quo
The current state of affairs
Expansion
(a property of rational decision making):
If x is chosen from the menu {x, y}, assuming that you are
not indifferent between x and y, you must NOT choose y
from the menu {x, y, z}.
menu dependence
when people’s
preferences are influenced by the menu
The ….. effect occurs when the introduction of a subpar
option causes individuals to change their preferences
decoy
compromise effect
(people’s tendency
to choose an alternative that represents a compromise or
middle option in the menu) which is sometimes described as
resulting from extremeness aversion
extremeness aversion
a tendency to avoid
options at the extremes
The value function has a kink at the ………….. ……..
in such a way that the curve is steeper for values less than
the reference point.
reference point
People’s sensitivity to changes in an outcome is ………. for
outcome levels that are further away from the reference
point.
smaller
A value function exhibits diminishing sensitivity if the
value function is …….. over gains and …….. over losses.
concave/convex
people value two gains more when they are ………… than when they are integrated
segregated
