Week 6 - Regret and Reversals

Question 1

We mentally keep score of rewards and punishments, promises and threats; What is the result of this?

Answer 1

1. We refuse to cut losses when doing so would admit failure
2. We are biased against actions that could lead to regret
3. We draw an illusory but sharp distinction between omission and commission, not doing and doing:
   * Because the sense of responsibility is greater for one than for the other

Question 2

Escalation of commitment

Answer 2

When decision-makers decide to keep investing despite negative interim feedback

1. Means have been investigated to achieve a certain goal
2. Negative feedback on its feasibility
3. Uncertain whether the goal will be achieved
4. Repeated opportunities to quit or continue decision making

Question 3

What is regret

Answer 3

The emotion regret is accompanied by:
1. Feelings that one should have known better
2. Having a sinking feeling
3. Thoughts about the mistake one has made

Question 4

Anticipated regret (upward)

Answer 4

Focuses on comparing outcomes that would have been better than the current option: “what if I find this luxury bag at a cheaper price in my home country”
* Less-impulsive purchase behavior

Question 5

Anticipated regret (downward)

Answer 5

Focuses on comparing outcomes that would have been worse than what actually occurred: “If I don’t buy this now, during my travels abroad, I’ll never be able to find it elsewhere”
* More impulsive purchase behavior

Question 6

Sunk Cost Fallacy

Answer 6

When someone is reluctant to abandon a strategy because they have invested heavily in it, even when it is clear that abandonment is more beneficial

Three theories:
1. Alchian-Allan Theorem
2. Avoiding waste
3. Thaler’s mental account theory

Question 7

Alchian-Allen Theorem

Answer 7

Once an additional - unrelated - fixed cost is added to two products, the ratio of the price difference in the total price between two products decreases.

If you have a cheap bag and expensive bag. You see the difference as very large. But if you are on holiday and already spent a lot of money on the flight ticket, the difference between the bags becomes smaller.

Question 8

Avoiding waste - Sunk Cost Fallacy

Answer 8

You have flought to Vietnam and want experiences on holiday, money becomes less of a problem. You will actually regret it if you don’t spent money.

“Since I am already here, I’d better buy more so as not to waste the investment on my transportation fee”

Question 9

Thaler’s mental account theory (impulsive shopping overseas)

Answer 9

1. Past investment opens a mental account
2. Utilities gained during travel are considered income
3. Income and expenditure should balance out to close the mental account

Question 10

What kind of regret can sunk cost lead to

Answer 10

Downward anticipated regret. This is due to waste avoidance. If you don’t spent your money, you will regrety it.

Question 11

After-sale risks

Answer 11

When shopping overseas, the distance between the vendor and home increases the cost of after-sales service (e.g. impractical)

Perceived after sale-risk negatively influences impulsive shopping behavior

Can increase upward anticipated regret

Question 12

What does rational decision making require?

Answer 12

The ability to process complete information

Question 13

What factors can have a negative effect on rational decision-making (in travelling)?

Answer 13

Information overload and confusion
* Worry and uncertainty in decision making
* Increased upward and downward anticipated regret

Question 14

What were the results of Guan et al. about impulse purchases overseas

Answer 14

1. Sunk cost and downward anticipated regret are related to more impulse purchases overseas
2. Sunk-cost and information confusion are related to more downward anticipated regret and, in turn, to more impulse purchases overseas
3. After-sales risks reduces impulse purchases overseas
4. Upward anticipated regret did not have a significant effect

Question 15

Norm theory

Answer 15

1. Normality depends on cognitive availability of stimuli or events and possible alternatives
   * The ease by which one can retreive similar instances and think of alternatives
   * Normality in terms of past behavior
2. Abnormal stimuli and events tend to stand out and elicit stronger reactions like regret and surprise

Question 16

Effort vs Talent

Answer 16

Preference depends on which category is activated/salient: effort theory or talent theory

Quality first:
High effort:
* Higher quality
* Higher perceived value
* Higher perceived talent

Talent first:
* No significant effect of effort on quality or talent. Not clear whether effort influenced perceived value

Question 17

Moral preferences

Answer 17

1. Single evaluation (without comparision to child on fire): Bank receives higher compensation
   * Possibly due to anchoring
2. Joint evaluation: Sympathy results in higher compensation for the child

Question 18

What is the role of framing in moral gains vs moral losses

Answer 18

Framing in terms of gains vs losses can result in incosistent preferences

Question 19

The implications of preference reversals

Answer 19

The beliefs we endorse when reflecting about morality (system 2) do not necessarily govern our emotional reactions (system 1)
* Hence, the moral intuitions that come to mind in different situations are not internally consistent

Moral intuitions that come to mind in different situations are not internally consistent.

This inconsistency can be exploited. But system 2 is not necessarily better than system 1.

Question 20

The taboo tradeoff (Loss-averse moral attitudes vs efficient risk-management)

Answer 20

Not willing to accept a small increase in risk (e.g. save money on cheaper health insurance), even though it may free up resources for more effective risk management (e.g. buy a safer car)

Question 21

Moral licensing

Answer 21

1. Allowing oneself to indulge in something bad after doing something good first
2. Thaler’s mental account: past investments opens a mental account.

Question 22

When does moral licensing happen?

Answer 22

1. The behavior is relatively unimportant to one’s identity
2. The behavior is framed as progress rather than commitment to a goal
3. Avoiding hypocrisy is of minor concern

Question 23

What was the aim of Tiefenback et al. (energy conservation)?

Answer 23

If succesful campaigns to reduce water consumption by a person activated moral licensing. Consequently, if people save energy with showering, they may think they can use more energy for other things, which backfires the campaign.

Question 24

What were the results of Tiefenback et al. about energy conservation?

Answer 24

1. In the feedback period: significant reduction in water consumption due to the intervention
2. Significant increase in overall energy consumption –> moral licensing (backfire of the intervention)
3. Net negative energy outcome was higher overall than before, despite succesful reduction of water consumption.

Question 25

Implications of the energy conservation study

Answer 25

When designing an intervention, we have to consider that it might be significant for one particular domain but then people try to compensate for their ‘good’ behavior in other ways, which may make the intervention backfire.

Question 26

Reducing moral licensing

Answer 26

1. Framing behavior as goal commitment vs goal progress

Better to focus on a superordinate goal than a subordinate goal:
* Subordinate goal: studying
* Superordinate goal: job market preparation

Superordinate goal –> commitment frame –> redouble academic efforts rather than feel licensed to socialize (consistency effect)

2. Revealing hypocrisy

• Effective when:
  People’s prior behavior is perceived as a claim about their own moral values/identity
  People’s prior behavior is in the same domain as the subsequent, potentially hypocritical behavior Unambiguous hypocritical behavior

Question 27

Quality First - Judgement order effects

Answer 27

Quality first:
1. Overall quality
2. Selling prize
3. Painters talent

Talen first:
1. Painter’s talent
2. Selling prize
3. Overall quality

Question 28

Fourfold pattern

Answer 28

High probability x gains: 95% chance to win, fear of dissapointment, risk averse, accept unfavorable settlement (endowment effect)

High probability x losses: 95% chance to lose, hope to avoid loss, risk sekking, rejecting favorable settlement (sunk cost fallacy)

Low probability x gains: 95% chance to win, hope of large gain, risk seeking, reject favorable settlement

Low probability x losses: 95% chance to lose, fear of large loss, risk averse, accept unfavorable settlement