Week 4

Question 1

What are context-dependent preferences

Answer 1

An individual’s choices and preferences can vary depending on the specific circumstances/context in which a decision is made

Question 2

Several factors can influence context-dependent preferences

Answer 2

• Social norms
• Decision framing
• Availability of alternatives

Question 3

What is mental accounting

Answer 3

How people categorize and treat money differently based on subjective criteria, such as the source of the money or its intended use, even though all money is technically interchangeable (e.g., money for groceries, holidays etc)
- People make decisions as if the accounts were unrelated
- Each mental account has its own utility function

Question 4

Mental accounting includes 3 things

Answer 4

• Use of heuristics
• Loss aversion
• Sunk costs

Question 5

What is the formula for MRS

Answer 5

MRS (Slope of IC) = -p2/p1 (Slope of BC)

Question 6

Eply et al (2006) - Income tax rebate check experiment

Answer 6

87% of the income tax rebate check if it was called “bonus income” vs only 25% spent the “withheld income”

Question 7

What are the keys to mental accounting

Answer 7

• Decisions are made as if the budget for different mental accounts are not exchangeable
• Losses and gains relative to a reference point in each account are treated differently according to a value function
• Individuals receive transaction utility as well as consumption utility

Question 8

Transaction utility definition

Answer 8

Happiness that individuals derive from the process of making a purchase (separate to the utility they receive from consuming the good itself)

Question 9

Reference-dependent Preferences Definition

Answer 9

An individual evaluates outcomes relative to a reference point, then classify gains and losses

Question 10

Example of reference dependent preferences

Answer 10

Online privacy
- Individual privacy notices don’t always result in the same levels of disclosure
- Consumers evaluate privacy notices relative to the status quo (their current/past level of protection)

Question 11

Status quo bias definition

Answer 11

Effect that people are biased in favour of choosing the status quo in decision problems (people’s preference for keeping things the way they currently are)

Question 12

Example of status quo bias

Answer 12

2 systems of organ donation in Europe
- Explicit consent (e.g., UK)
- Presumed consent (e.g., France)

Question 13

Reference dependence has many different causes - name 3

Answer 13

• Loss aversion
• Transaction costs
• Perceptual coding

Question 14

Tversky and Kahneman (1991) - reference state

Answer 14

Although the reference state usually corresponds to the decision maker’s current position, it can be influenced by expectations, norms and aspirations

Question 15

Redelmeier and Tversky (1992) - gamble experiment

Answer 15

Result: People tend to be very risk averse for lotteries that contain both gains and losses