According to R. Thaler, people keep mental subaccounts with different marginal spending propensities.
In Situation 1, the decision to buy a new ticket to the concert after losing 20€ is influenced by the fact that the 20€ was initially intended for the concert admission.
The Nobel Prize in Economic Science in 2002 was awarded to Daniel Kahneman for his work on integrating psychological insights into economic science.
The combination of overweighting small probabilities and concave/convex value function results in risk-averse behavior in the case of gains with moderate probabilities.
The decision-making biases mentioned in the text include status-quo bias, loss aversion, availability/salience, and decision inertia.
The utility function is linked to relative profits and losses, rather than final asset values.
The perception of gains and losses is reference-dependent.
Descriptive statements show how people actually judge and behave.
Normative statements are subjective value statements that can be checked for correctness.
Prescriptive statements describe how people should act, assuming certain goals or values.
Rational versus irrational use of information is not covered within the brain metaphor.
On average, people give more than zero CHF to person B in a dictator game is an example of a descriptive statement.
Descriptive theories describe how people should act, assuming certain goals or values.
Example: People should give up their entire equipment in Public Good if they want to maximize group welfare is an example of a prescriptive statement.
The Peak-End Rule suggests that the final experience significantly impacts the overall memory of an event.
Availability heuristics influence decision-making by causing people to overestimate the likelihood of spectacular causes of death due to their cognitive accessibility.
The experiment 'Do the day's shopping' demonstrates how individuals' choices are influenced by the manner in which options are presented, impacting the variety of selections made.
The tyranny of choice refers to the difficulty people experience in making choices due to the abundance of possibilities.
The study 'When choice is demotivating' shows that a larger selection of options can lead to decision paralysis and decreased satisfaction with the chosen option.
The text emphasizes that the real preferences of individuals are accurately reflected in remembered and expected utility.
Environmental factors, such as family, friends, rankings, and reporting, have no influence on the availability of information and decision-making.
Subjective assessment of probabilities is not influenced by the accessibility of information in memory, timing of last access, and salience.
Tversky & Kahnemann (1974) found that people tend to consider more possibilities when they are presented with a larger amount of information initially.
Fischhoff, Slovic, Lichtenstein (1978) highlighted the impact of availability of possibilities on the accuracy of error analysis and assessment of probabilities.
Salience refers to the low visibility and attention-grabbing nature of information.
Anchoring and adjustment effects do not influence business decision making, as seen in examples such as pricing strategies and labor decisions.
Englich et al. (2009) demonstrated that anchoring does not influence legal judgments, with judges giving different sentences based on dice outcomes serving as anchors.
Framing of decisions does not alter choices, as evidenced by the preference for certain gains and aversion to certain losses in Prospect Theory.
Behavioral Economics and Decision Making
- Subjective assessment of probabilities is influenced by the accessibility of information in memory, timing of last access, and salience.
- Tversky & Kahnemann (1974) found that people tend to consider more possibilities when they are presented with a larger amount of information initially.
- Fischhoff, Slovic, Lichtenstein (1978) highlighted the impact of availability of possibilities on the accuracy of error analysis and assessment of probabilities.
- Salience refers to the high visibility and attention-grabbing nature of information.
- Anchoring and adjustment effects influence business decision making, as seen in examples such as pricing strategies and labor decisions.
- Englich et al. (2009) demonstrated how anchoring influences legal judgments, with judges giving different sentences based on dice outcomes serving as anchors.
- Framing of decisions alters choices, as evidenced by the preference for certain gains and aversion to certain losses in Prospect Theory.
- Prospect Theory shows that losses loom larger than gains, leading to loss aversion.
- Reference points, such as the status quo, play a crucial role in the evaluation of gains and losses in decision making.
- Decision weight function demonstrates that probabilities are not directly included in assessments, affecting choices between certain outcomes and probabilistic outcomes.
- The value function in Prospect Theory is concave in the profit area and convex in the loss range, reflecting different perceptions of gains and losses.
- The text emphasizes the impact of behavioral economics on decision making, highlighting how psychological factors influence choices and judgments.
Test your knowledge of behavioral economics and decision making with this quiz. Explore concepts like anchoring and adjustment effects, framing of decisions, Prospect Theory, reference points, and the impact of psychological factors on choices and judgments.
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