Decision-Making and Sunk-Cost Effect Review

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Questions and Answers

What psychological phenomenon does the sunk-cost effect illustrate in decision-making?

Acceptance of probabilities as they are

The tendency to continue an endeavor once an investment in money, effort, or time has been made (correct)

Making decisions based only on intuition without analytical thinking

Rational choice based solely on future outcomes

Which of the following factors is crucial for effective debiasing in decision-making?

Reducing the complexity of decisions to avoid confusion

Increasing reliance on intuition over reasoning

Awareness of one's cognitive biases (correct)

Focusing exclusively on past experiences

How does normative rationality differ from behavioral economics?

Behavioral economics strictly adheres to traditional economic theories

Normative rationality assumes individuals always make optimal decisions (correct)

Normative rationality incorporates emotional influences in decision-making

Behavioral economics focuses on mathematical models exclusively

What is a primary goal of debiasing interventions?

To reduce the influence of irrelevant information on decision-making Signup and view all the answers

Which psychological model is often associated with the concept of rational choice?

Behavioral model of rational choice Signup and view all the answers

What role does self-reflection play in decision-making processes?

It helps individuals recognize and correct biases Signup and view all the answers

What is a characteristic of intuition as it relates to decision-making?

It can lead to quick decisions that lack rigor Signup and view all the answers

In behavioral economics, what is the significance of heuristics?

Heuristics simplify decision-making but can introduce biases Signup and view all the answers

What is primarily examined in the study by Hong and Chang regarding decision-making?

The role of self-construal in decision-making Signup and view all the answers

What is the focus of Deci and Ryan's work on goal pursuits?

How human needs influence behavior motivation Signup and view all the answers

Which phenomenon is described by Hsee and Weber in the context of risk preferences?

Self-other discrepancies Signup and view all the answers

What concept do Hastie and Dawes challenge in their work on rational choice?

The accuracy of rational decision being limited Signup and view all the answers

What aspect of decision-making does Donovan, Güss, and Naslund focus on in their research?

Improving dynamic decision-making through training Signup and view all the answers

What does the power primer discussed by Cohen emphasize?

The impact of statistical power on experimental results Signup and view all the answers

What critical argument is presented by Kahneman and his colleagues regarding major decisions?

Self-reflection before making major decisions can reduce error Signup and view all the answers

What do Detje's theories of human action explain?

The complexities involved in human behaviors and decision-making Signup and view all the answers

What does the homo oeconomicus model suggest about human beings?

They prioritize monetary goals and have stable preferences. Signup and view all the answers

How do cognitive biases influence human decision-making?

They lead to a systematic departure from normative standards. Signup and view all the answers

What percentage of business decisions, according to Nutt (2002), are reported to fail?

50% Signup and view all the answers

What is a common misconception regarding cognitive biases and human decisions?

Cognitive biases do not affect most people's decisions. Signup and view all the answers

Which of the following best characterizes 'sunk-costs' in decision-making?

Costs that have already been incurred and cannot be recovered. Signup and view all the answers

Which statement is true regarding real-life decision-making as discussed in the research?

It can be significantly influenced by cognitive biases. Signup and view all the answers

What role do debiasing interventions play in decision-making?

They provide tools to more accurately evaluate decisions and options. Signup and view all the answers

How does the perception of human decision-making shortcomings affect its evaluation?

It tends to exaggerate the idea of human irrationality. Signup and view all the answers

Study Notes

Sunk-Cost Effect and Decision-Making

The sunk-cost effect refers to the tendency of individuals to continue an endeavor, or continue consuming, based on prior investments rather than future costs or benefits.
Meta-analytic reviews highlight this bias's significant impact on economic decision-making, revealing patterns of irrationality in human behavior.
Simon's model of rational choice suggests humans act as rational agents aiming to maximize utility, yet empirical research indicates systematic deviations from this model due to cognitive biases.

Cognitive Biases

Cognitive biases systematically affect real-life decision-making, challenging the assumption of human rationality.
Past studies indicate that about 50% of business decisions fail, underscoring a perceived flaw in human decision-making capabilities.
Various taxonomies exist to categorize these biases, informing on how they influence choices.

Debiasing Techniques

Techniques for debiasing are essential to improve decision-making, suggesting structured approaches to mitigate the impacts of biases.
Known methods include training and self-reflection which can enhance dynamic decision-making abilities in uncertain environments.

The Role of Intuition and Reasoning

Research explores the interplay between intuition and analytical reasoning in decision-making, suggesting that different self-construals may influence reliance on feelings versus reasoning.
Intuition plays a critical role alongside cognitive processes, impacting how choices are framed and evaluated in scenarios involving risk and uncertainty.

Implications for Economic Behavior

The discussion surrounding the homo oeconomicus model reveals the contrast between theoretical expectations and actual behaviors observed in real-world contexts.
The investigation into self-reflection and insight emphasizes the importance of understanding motivation behind biased decisions, potentially leading to strategies that enhance decision quality.

Overall Themes

Investigation of decision-making processes highlights the importance of understanding biases, intuition, and the rationality model.
Insights gained from examining cognitive behavior can inform practical applications in fields such as economics, psychology, and business management.

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Description

This quiz explores the concepts of the sunk-cost effect in economic decision-making, as discussed in various scholarly articles. It also reviews heuristics and biases in judgment under uncertainty as presented by prominent researchers. Test your knowledge on these key behavioral economics topics.