Week 6 - Regret and Reversals Flashcards
We mentally keep score of rewards and punishments, promises and threats; What is the result of this?
- We refuse to cut losses when doing so would admit failure
- We are biased against actions that could lead to regret
- 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
Escalation of commitment
When decision-makers decide to keep investing despite negative interim feedback
- Means have been investigated to achieve a certain goal
- Negative feedback on its feasibility
- Uncertain whether the goal will be achieved
- Repeated opportunities to quit or continue decision making
What is regret
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
Anticipated regret (upward)
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
Anticipated regret (downward)
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
Sunk Cost Fallacy
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
Alchian-Allen Theorem
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.
Avoiding waste - Sunk Cost Fallacy
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”
Thaler’s mental account theory (impulsive shopping overseas)
- Past investment opens a mental account
- Utilities gained during travel are considered income
- Income and expenditure should balance out to close the mental account
What kind of regret can sunk cost lead to
Downward anticipated regret. This is due to waste avoidance. If you don’t spent your money, you will regrety it.
After-sale risks
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
What does rational decision making require?
The ability to process complete information
What factors can have a negative effect on rational decision-making (in travelling)?
Information overload and confusion
* Worry and uncertainty in decision making
* Increased upward and downward anticipated regret
What were the results of Guan et al. about impulse purchases overseas
- Sunk cost and downward anticipated regret are related to more impulse purchases overseas
- Sunk-cost and information confusion are related to more downward anticipated regret and, in turn, to more impulse purchases overseas
- After-sales risks reduces impulse purchases overseas
- Upward anticipated regret did not have a significant effect
Norm theory
- 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 - Abnormal stimuli and events tend to stand out and elicit stronger reactions like regret and surprise
Effort vs Talent
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
Moral preferences
- Single evaluation (without comparision to child on fire): Bank receives higher compensation
* Possibly due to anchoring - Joint evaluation: Sympathy results in higher compensation for the child
What is the role of framing in moral gains vs moral losses
Framing in terms of gains vs losses can result in incosistent preferences
The implications of preference reversals
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.
The taboo tradeoff (Loss-averse moral attitudes vs efficient risk-management)
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)
Moral licensing
- Allowing oneself to indulge in something bad after doing something good first
- Thaler’s mental account: past investments opens a mental account.
When does moral licensing happen?
- The behavior is relatively unimportant to one’s identity
- The behavior is framed as progress rather than commitment to a goal
- Avoiding hypocrisy is of minor concern
What was the aim of Tiefenback et al. (energy conservation)?
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.
What were the results of Tiefenback et al. about energy conservation?
- In the feedback period: significant reduction in water consumption due to the intervention
- Significant increase in overall energy consumption –> moral licensing (backfire of the intervention)
- Net negative energy outcome was higher overall than before, despite succesful reduction of water consumption.
Implications of the energy conservation study
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.
Reducing moral licensing
- 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)
- 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
Quality First - Judgement order effects
Quality first:
1. Overall quality
2. Selling prize
3. Painters talent
Talen first:
1. Painter’s talent
2. Selling prize
3. Overall quality
Fourfold pattern
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
