Econ 440: Lecture 4 - More on Biases and Heuristics

Questions and Answers

What concept explains the valuation of an experience being influenced by an arbitrary factor such as the last digit of a social security number?

Framing Effect

Anchoring Bias

Value Coherence

Coherent Arbitrariness (correct)

What outcome did the experiment by Ariely, Loewenstein, and Prelec reveal about participants' willingness to pay based on their initial prompts?

Participants with even digits valued the workshop higher than those with odd digits. (correct)

Odd digit participants showed a more positive valuation than even digit participants.

Even digit participants had a more negative valuation than odd digit participants.

Participants from both groups had equal willingness to pay.

What is the purpose of using a price list method in experiments?

To determine the maximum willing price by systematically varying price points. (correct)

To prevent participants from making irrational decisions.

To gather qualitative feedback from participants.

To randomly assign participants to different treatment groups.

What effect can occur when irrelevant information is considered during decision-making processes?

Bias Signup and view all the answers

Which condition describes the scenario under which participants stated their willingness to pay $n for attending a poetry reading?

Participants with an odd last digit were asked if they would pay $n. Signup and view all the answers

What is the hot hand fallacy?

The belief that streaks in outcomes increase the likelihood of repeating the same result. Signup and view all the answers

What is the gambler’s fallacy?

The assumption that streaks of losses indicate future wins. Signup and view all the answers

Based on the study by Gilovich, Vallone, and Tversky, what was the next shot make percentage after 3 makes?

46% Signup and view all the answers

What do the results of the Gilovich, Vallone, and Tversky study suggest regarding the hot hand?

The results indicate no significant patterns supporting the hot hand belief. Signup and view all the answers

Which statement about the independence of events is accurate according to biases and heuristics?

Each flip of the coin is independent of previous flips. Signup and view all the answers

In the context of a fair coin flipped 10 times with all heads, what does the hot hand fallacy suggest?

The upcoming flip will likely be heads due to the streak. Signup and view all the answers

What was the make percentage after 2 misses in the Gilovich study?

53% Signup and view all the answers

Which of the following best describes the expectation if one believes in the gambler's fallacy after a series of wins?

The next outcome is less likely to be a win. Signup and view all the answers

What does the hot hand fallacy demonstrate about people's perception of random events?

People believe that short-term sequences reflect broader trends. Signup and view all the answers

Which statement accurately describes bounded rationality?

It highlights the lack of cognitive resources in evaluating all potential outcomes. Signup and view all the answers

What is the primary error associated with the gambler’s fallacy?

The belief that independent events are influenced by previous outcomes. Signup and view all the answers

In narrow framing, what do individuals tend to ignore?

The implications of their choices beyond the immediate context. Signup and view all the answers

What is the primary function of heuristics in decision-making?

To facilitate quick and efficient solutions in complex situations. Signup and view all the answers

What does mental accounting suggest about how people perceive financial decisions?

People categorize money into different 'accounts' based on subjective criteria. Signup and view all the answers

How can the hot hand fallacy and gambler's fallacy be linked to heuristics?

Both demonstrate how heuristics misrepresent probabilities in random sequences. Signup and view all the answers

In the context of decision-making, what does it mean to have a narrow frame?

To limit considerations to a few immediate options rather than evaluating broader choices. Signup and view all the answers

What is a common misconception regarding small sample sizes in probability?

Small samples are often viewed as accurate representations of larger populations. Signup and view all the answers

What is the key difference in how the lost $10 is perceived in Problem A compared to Problem B?

In Problem A, there is still room in the entertainment budget for additional purchases. Signup and view all the answers

How do the percentages from each problem suggest a decision-making bias?

They imply that perception is influenced more by the framing of the problems than by actual outcomes. Signup and view all the answers

What does the term 'coherent arbitrariness' refer to in the context of decision-making?

The randomness of choices when different framing is applied but still leading to consistent preferences. Signup and view all the answers

What role does mental accounting play in decision-making according to the content?

It helps individuals compartmentalize financial decisions, impacting future purchases. Signup and view all the answers

Why might the framing of decisions lead to different perceptions of value in similar scenarios?

Because the same outcomes can be interpreted variably based on context. Signup and view all the answers

In the context of the presented problems, what impact does the total wealth remaining have on decision-making?

It can create a false sense of financial security that impacts future decisions. Signup and view all the answers

What is a likely outcome of narrow framing when individuals evaluate their decision to buy a ticket?

They may ignore previous spending limits set by their entertainment budget. Signup and view all the answers

What psychological concept determines how external presentation of information influences decision-making?

Framing effects Signup and view all the answers

What is the consequence of maxing out the entertainment budget in Problem B?

It prevents individuals from contemplating additional purchases even if they desire them. Signup and view all the answers

How does the loss of $10 in both problems illustrate different emotional responses?

Loss is perceived more severely when it is framed as part of an existing budget constraint. Signup and view all the answers

What statistical concept illustrates the flawed reasoning in the Hot Hand Fallacy?

Law of small numbers Signup and view all the answers

How does a player’s recent high performance typically affect their probability of succeeding in their next at-bat in baseball?

Increases their likelihood of success Signup and view all the answers

Which of the following is true regarding the hot hand in basketball compared to baseball?

Baseball players face less defensive adjustment compared to basketball players Signup and view all the answers

What does the gambler’s fallacy suggest about random events such as gambling outcomes?

They are influenced by previous outcomes in predictable ways Signup and view all the answers

What surprising evidence regarding the hot hand did Gilovich et al. (1985) find?

There is indeed evidence of an 11 percentage point increase in success following makes Signup and view all the answers

In the context of the hot hand fallacy, what is one reason that gamblers may believe they are 'hot' or 'cold'?

Due to recent winning streaks influencing their bets Signup and view all the answers

What is one challenge to the hot hand notion in basketball as discussed by researchers?

Defensive strategies can effectively neutralize a hot player Signup and view all the answers

What aspect of betting behavior does Terrell's (1994) lottery study aim to analyze in relation to the gambler's fallacy?

Betting patterns based on past winning streaks Signup and view all the answers

What was a conclusion drawn from the data analysis of over 2 million player batting appearances?

There is a clear predictive relationship between recent and future performance Signup and view all the answers

Study Notes

Research Group Preferences

Submit preferences for research groups on Canvas by 8pm on September 1.
Group assignments to be announced in the next class.

Hot Hand Fallacy

Belief that success in an independent event signals ongoing success.
Example: A fair coin that has shown heads multiple times is thought to have higher probability of heads in the next flip.

Gambler's Fallacy

Belief that a series of independent events will balance out.
Example: After several heads in a row, the next flip is thought to be more likely tails.

Evidence from Gilovich, Vallone, and Tversky (1985)

Analyzed shooting accuracy of Philadelphia 76ers players.
Outcomes of shots after streaks:
- 3 misses: 56% made
- 2 misses: 53% made
- 1 miss: 54% made
- 1 make: 51% made
- 2 makes: 50% made
- 3 makes: 46% made
Findings challenge the hot hand theory, suggesting no significant pattern.

Counter Evidence to Hot Hand

Miller and Sanjurjo (2018) argue that some sequences bias results.
Example of coin flips shows that subsequent tails may be more likely if preceded by a sequence of heads due to restrictions from prior outcomes.

Baseball Analysis of Hot Hand

High performance in baseball correlates with future success since the game structure (one batter at a time) limits defense adjustments.
Analysis of over 2 million player appearances revealed being "hot" increases chances of success (e.g., home runs) by approximately 20%.

Evidence from Terrell (1994)

Examined lottery behaviors in New Jersey.
Events leading to payouts from drawn numbers showed variance based on frequency of past wins:
- Winning number within last week: average payout $349.06
- Not within last 8 weeks: average payout $260.11
Findings demonstrate gambler’s fallacy influences betting behavior.

Source of Fallacies

Both fallacies draw on the misunderstanding of randomness in small samples.
Hot hand assumes small samples reflect larger patterns; gambler’s fallacy believes balance will be restored.

Bounded Rationality

Concept that cognitive limits constrain people's decision-making abilities.
Individuals use heuristics to simplify complex decisions (e.g., choosing affordable lunch options).

Narrow Framing

Tendency to consider a limited set of choices when making decisions.
Example: Comparisons between two menu items ignore broader financial impacts.

Mental Accounting

Valuation based on discrete budgets (e.g., entertainment budget). Past costs may affect future decisions about spending.

Coherent Arbitrariness

Decision-making influenced by presentation of options and arbitrarily assigned values.
Experiment with social security digits influencing willingness to attend a poetry workshop.

Methodological Note: Price Lists

Price lists are tools to determine valuation of experiences through a series of yes/no questions at varied prices.
Should prompt a one-time switch from No to Yes, reflecting maximum willingness to pay.

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Description

This quiz explores concepts related to biases and heuristics, specifically focusing on the Hot Hand Fallacy and Gambler’s Fallacy. It is designed for students in Econ 440 at Texas A&M University. Prepare to test your understanding of these psychological phenomena in decision-making.