2 Cognition and Consumer Psych

Question 1

Review

Endownment effect

Answer 1

-tendency for people who own a good to value it more than people who do not
-attributed to loss aversion
-evolutionary, strategic, and basic cognitive origins
-they propose that all three major instantiations of the endowment effect are attributable to exogenously and endogenously
induced cognitive frames that bias which information is accessible during valuation

-demonstrated in two experimental paradigms: exchange paradigm, valuation paradigm

Question 2

Review

Definitions

Answer 2

-Attribute sampling bias: cognitive process account that can connect these findings, parsimoniously explain the different instantiations of the endowment effect, and make new predictions
-Coase theorem: entitlements will be efficiently distributed through bargaining regardless of their initial allocation if transaction costs are minimal. Initial
allocations could influence the eventual wealth of parties, but the theorem
assumes that initial ownership status of an entitlement should not affect its value.
-Confirmatory hypothesis testing: searching for and evaluating evidence in a
manner more likely to confirm than disconfirm the hypothesis one is testing.
-Entitlement: a privilege or legal right to an economic benefit
-Incentive-compatible design: an experimental design in which participants are
incentivized to reveal their true preferences and valuations.
-Indifference curves: rate at which people are indifferent between quantities of
two goods. How much of Good A is equivalent in utility to an amount of Good B.
-Loss aversion: a loss (e.g., $100) has a greater psychological impact than a
gain of the same size (e.g., +$100).

Question 3

Review

Definitions Part 2

Answer 3

-Opportunity costs: the utility that alternative options would provide.
-Possession loss aversion: greater sensitivity to the loss of possession than to
its acquisition
-Prospect theory: a descriptive theory of decision-making under uncertainty. It assumes reference dependence, loss aversion, diminishing marginal utility, and non-linear decision weights.
-Reference-dependence: evaluating a stimulus by its value relative to a reference
point rather than by its absolute value.
-Self-affirmation: deliberate elaboration on one’s past behavior in accordance
with a personally important value, which may buffer or mitigate psychological
threats to the self.
-Self-referential memory effect: actively relating information to oneself (e.g.,
‘Does the word X describe you?’), makes it better remembered than processing
it in other ways, such as with regard to other people, its semantic meaning
(e.g., ‘. . . mean Y?’), or phonemic properties (e.g., ‘. . .rhyme with Y?’).
-Transaction costs: costs of exchanging resources, specific to the exchange itself.
-Wealth effects: behavior resulting from actual or perceived changes in wealth.
-Willingness to pay/willingness to accept (WTP–WTA) gap: the difference in the
amount of money that people are WTP to acquire a good and are WTA to
relinquish it

Question 4

Review

Loss aversion

Answer 4

-loss averse: the psychological impact of a
loss is greater than an equivalent gain
-goods have greater perceived value when selling them than when buying them

Question 5

Review

Reference prices

Answer 5

-reference prices = comparison standards drawn from the external
environment or retrieved from memory

Reference price theory: when the true value of a good to a person compares unfavorably to salient
reference prices, buyers will reduce their stated WTP and
sellers will inflate their stated WTA to avoid transaction
disutility (getting a ‘bad deal’)
-unique prediction that
WTP–WTA gaps will be smallest when reference prices are moderate and when buyers and sellers are similarly affected by transaction disutility
-No gap was found when
participants were prompted to consider its expected value (a moderate reference price)

Question 6

Review

Conclusion

Answer 6

-endowment effect can no longer solely be attributed to a traditional loss
aversion account
-Different elicitation methods and psychological ownership lead people to consider different
information when valuing a good, and not to weight the
same information differently. -We propose an integrative
process account that specifies how biased information-processing theories of WTP–WTA gaps can be extended
to explain reluctance to trade and mere ownership effects.

Question 7

Ch6

What are judgmental heuristics?

Answer 7

1. Judgmental dimension of interest
2. This substitute information is linked to the judgment dimension of interest = a heuristic stimulus or cue
3. Strategies that combine cues and judgmental dimensions = heuristics

-Heuristics = simple “rules of thumb” that are applied to readily available information and allow a person—even when information, capacity, or motivation are lacking—to arrive at a judgment.

Question 8

Ch6

Availability heuristic

Answer 8

-judgments of frequency or probability may be influenced by the ease or difficulty with which relevant instances come to mind

Question 9

Ch6
Availability heuristic
Logic

Answer 9

“If I can recall an event with ease, it probably occurs frequently”
“If I can imagine an event with ease, it is likely that the event will occur frequently.”
-based on observed contingencies in our learning environment, in which things that occur frequently are recalled with greater ease

-> “When p then q”, to “when q then p”
-If the link between frequency and ease were bidirectionally true, this inversion would be unproblematic
HOWEVER
-memory are influenced not only by the frequency of the information to be remembered, but also by factors that are not or only indirectly linked to frequency

Question 10

Ch6
Availability heuristic
Experienced ease or content?

Answer 10

EASE
-feeling of ease or difficulty is used as a piece of information in judgment

= when individuals use the availability heuristic in judgment,
they presumably use the experienced ease of cognitive processing as a cue for judgment formation: when it feels easy, objects or events are judged to be frequent or probable; when it feels difficult, frequency and probability are judged to be low.

Question 11

Ch6
Availability heuristic and
Assessing risk

Answer 11

• risk of dramatic and sensational events was overestimated
• rather inconspicuous causes of death were underestimated
• because conspicuous events receive a lot of media attention, while silent causes of death do not
• individuals draw on experienced ease when judging the risk of certain events
• biased risk assessments may result in maladaptive risk behavior

Question 12

Ch6
Availability heuristics and
Assessing alternative course of events

Answer 12

-ease with which we can undo an event in our mind may strongly influence judgments

Question 13

Ch6

Availability heuristic and Egocentric Bias

Answer 13

• participants’ own contributions come to mind more easily than those of their partners
• If these experiences of ease or difficulty are then used in judgment, one’s own contributions are overestimated simply as a function of the availability heuristic
• fairness considerations

Question 14

Ch6

Representativeness Heuristics

Answer 14

-whether a certain element is part of a larger category
-judging by representativeness means asking how well a concrete case represents an
abstract model
-uses similarity and typicality as the basis for categorization and probability judgments: the more typical the concrete case is for the model, the greater the assessed probability that the case belongs to this model, and the greater the likelihood that the case will be assigned to this category

Question 15

Ch6
Representativeness Heuristic
and Logic

Answer 15

“If a person is similar to a certain group, the person is likely a member of this social category,”
“If an event is similar to a category, it likely pertains to the category.”

-use of representativeness can lead to erroneous judgments if other factors that determine the probability of occurrences are neglected or fundamental principles of probability are ignored

Question 16

Ch6
Representativeness Heuristic
and Ignoring Base Rates

Answer 16

• individuals often neglect base rates and tend to judge others by representativeness
• different base rates had minimal effect on probability judgments ->participants relied on the specific description
• Participants’ judgments reflected the base rate information quite accurately only if no individuating information was provided, suggesting that representativeness is a fairly powerful source of information in assigning category membership.

Question 17

Ch6
Representativeness Heuristic

The conjunction fallacy: disregarding the principle of extensionality

Answer 17

-The principle of extensionality maintains that if a result A includes the result B, the probability for B cannot be higher than for A.

Example:

a. Banker
b. Banker and Feminist

Question 18

Ch6
Representativeness Heuristic

A part is representative of the whole: misperception of coincidence

Answer 18

15, 3, 8, 47, 23, 14
1, 2, 3, 4, 5, 6

• both sequences are equally likely, they are differently representative for what individuals perceive as random
• intuitive perception of a random sample excludes regularities
• regularities are perceived as highly untypical for random processes
• individuals even expect more alternations and scattering in sequences than would be normatively expected for a random process
• > As a result, sequences that appear representative for random samples are considered to be more probable

Question 19

Ch6

Anchoring and Adjustment

Answer 19

• that individuals gauge numerical size by starting from an initial value (an anchor), which they then adjust during the subsequent course of processing to arrive at their final judgment
• > judgments are distorted in the direction of the starting value
• phenomenon of assimilating a judgment to a starting value = anchoring and adjustment
• anchor can originate from other sources
• even incentives to render especially accurate judgments or explicit instructions not to let oneself be influenced by the anchor do not reliably reduce the anchoring effect -> anchoring effect = remarkably robust

Question 20

Ch6
Anchoring and Adjustment
and Logic

Answer 20

-to explain the anchoring effect:
Selective Accessibility Model (SAM)
-invokes 2 fundamental cognitive processes:
1. Selective Hypothesis Testing = the processing of the anchor information: individuals test the possibility that the anchoring value in fact corresponds to the actual location of the judgmental object on the judgmental scale
-anchor-consistent knowledge
2. How does selectively heightened accessibility lead to anchoring? Semantic priming = mediating process

-The SAM suggests that anchoring effects should be diminished when hypothesis-inconsistent knowledge is made available in the first step. To

Question 21

Ch6
Anchoring and Adjustment
to explain other judgmental phenomena

Answer 21

1. FUNDAMENTAL ATTRIBUTION ERROR:
   overestimation of the influence of personal factors on the behavior of others and the simultaneous underestimation of the influence of situational factors
2. HINDSIGHT BIAS
   having access to the correct solution to a problem, individuals in retrospect overestimate the likelihood that they correctly solved the problem or would have been able to do so

Question 22

Ch6
Alternative explanations:
1. Task understanding

Answer 22

• Judgments and decisions depend not only on the information provided, but also on how this information is understood or encoded by participants
• the influence of the person information was strongly reduced if it was kept constant
• one alternative explanation of the conjunction effect rests on task understanding
• differences in task understanding may have contributed to the conjunction fallacy

Question 23

Ch6
Alternative explanations
2. Presentation format

Answer 23

• A second critique of the heuristics and biases approach is aimed at the fact that many problems are expressed in the form of probabilities
• our cognitive system is adjusted to the processing of frequencies but much less to the processing of probabilities
• heuristics and biases program may reflect primarily inadequacies in dealing with probability information
• the frequency format appears to be less reliable in causing a reduction of judgmental errors than was initially assumed
• judgmental errors occur less frequently in the frequency format does not explain their occurrence in the probability format.

Question 24

Ch6

Content-specific rules of thumb

Answer 24

-Content-specific rules of thumb imply the use of prior general knowledge, which may result from contingency learning in the environment, or may be acquired from others
-suggesting two roads to attitude change or person perception
-judging individual may be characterized as a manager or motivated tactician
picture
-both extensive processing and the recruitment of rules of thumb are tools the manager has at his or her disposal to accomplish judgment formation

Question 25

CH6

Heurisitcs: Blessing or Curse

Answer 25

• heuristics might also a blessing, because they help to save resources and spare individuals processing effort
• adaptive nature of heuristics

Question 26

Ch6

Summary

Answer 26

1 The process of generating a judgment can be simplified by using heuristics -> fast and frugal decision making
2 Three heuristics introduced by Tversky and Kahneman:
1. The availability heuristic posits that the ease with which information can be brought to mind may be used to form judgments of frequency and probability. 2.The representativeness heuristic uses perceived similarity to judge category membership.
3.the anchoring and adjustment heuristic describes how judgments are oriented toward initial pieces of information.
3 The heuristics introduced by Tversky and Kahneman are very general in nature and build on specific types of cognitive processing or inference (e.g., relying on experienced ease; semantic priming). Apart from these general heuristics, individuals also have content-specific rules of thumb at their disposal.
6 Content-specific rules of thumb are learned through contingencies or are acquired from other individuals.
7 Content-specific rules of thumb have received particular attention in the realm of attitudes and person perception. Models in these areas generally postulate two pathways: one effortful and one effortless. It is on the effortless pathway that heuristic cues have a particular impact when it comes to judgment and decision making.
8 In many scientific experiments, reliance on heuristics results in seemingly faulty judgments. The abundance of biases and mistakes in the literature, however, does not necessarily allow for conclusions about the ecological validity of reliance on heuristics in everyday life. Researchers often choose scientific situations and material very carefully precisely to show bias, because it is from error that new knowledge can be gained. But this choice of situations is not representative of all the situations in which heuristics can be applied.
9 Rather than being a constant source of error, researchers have argued that heuristics are a blessing, since they require few cognitive resources and still make us smart.

Question 27

Ch2

Value and utility

Answer 27

-marginal evolution:
construe price as the marginal value
of a good instead of its average value, stones are cheaper than diamonds
-people = utility maximizers, pricing follows from the decision-maker’s goal to maximize happiness and/or satisfaction
-St.Petersburg Paradox
-Solution to the paradox: Bernoulli´s principle of decreasinf marginal utility (that marginal utility decreases as the quantity consumed increases)

Question 28

Ch2

Risk and uncertainty

Answer 28

-Tannert, Elvers, Jandrig: taxonomy of uncertainty that pits the mismatch
between the knowledge required and the knowledge available for rational decision-making, basic distinction is between objective and subjective uncertainty

-Kahneman and Tversky: similar distinction between externally attributed uncertainty and internally attributed uncertainty
-> External uncertainty:
based on frequencies or on propensities
-> internal uncertainty can be based on arguments
or on knowledge.

Question 29

CH2

From excepted value to (subjective) expected utility

Answer 29

• expected value (EV) = v (value) x p (probability)

- subjective expected utility model (SEU)

Question 30

Ch2
Important axioms of SEU
and examples

Answer 30

1. Axiom of completeness: Either a ≿ b, or b ≿ a,
   or a ∼ b.
   Example (colour preference): Either you prefer
   azure over blue, or blue over azure, or you
   are indifferent between azure and blue
2. Axiom of transitivity: If a ≿ b and b ≿ c, then
   a ≿ c.
   Example: If you prefer azure over blue, and
   blue over cyan, you also prefer azure over
   cyan.
3. Axiom of continuity: b ∼ pa + (1-p)c.
   Example: If it is true that azure ≿ blue ≿
   cyan, then you are indifferent between blue
   and (azure with probability p and cyan with
   probability 1-p).
4. Axiom of independence: If a ≿ b, then xa +
   (1-x)c ≿ xb + (1-x)c.
   Example: If you prefer azure over blue, and
   blue over cyan, you also prefer (50% azure
   and 50% blue) to (50% azure and 50% cyan).

Question 31

CH2

Prospect theory

Answer 31

-by Kahnman and Tversky
-development of SEU was prospect theory (PT)
-entails separate functions for the evaluation
of probabilities, and for the translation of objective value into subjective utility
-distinguishes two phases of decision-making:
1. the editing phase (in which outcomes are assigned a subjective value by coding them in relation to some
reference point, and probabilities are translated into decision weights)
2. evaluation phase (the prospect with the highest evaluation is chosen)
-

Question 32

Ch2

Prospect theory formula

Answer 32

V(x, p; y, q)
= π( p)v(x) + π(q)v( y)

• V = the value function for an option with two possible outcomes
• x with probability
• p, and y with probability q
• v(0) = 0, and π denoting the weighting function
• with π(O) = 0, and π(1) = 1

-PT descriptively explains a large number of so-called biases in risky decisions, such as loss aversion, the framing effect, the endowment effect, the status quo bias or the fourfold
pattern of risk attitude

Question 33

Ch2

Heurisitcs

Answer 33

-Heuristics-and-biases program: deploys the intuition that people do not integrate all available information but use
simple rules to navigate the vast amount of information available in the world
-DEF:
(1) a search rule
(2) a stopping rule
(3) a decision rule
-Unlike the SEU model: the heuristic approach does not assume that the organism
needs to calculate value.

Question 34

Ch2

Decisions from Experience

Answer 34

-people frequently do not follow SEU theory
-In decisions from experience, people
either need to consult their memory, or to actively sample information from the environment
-In decisions from experience, the reverse pattern has been found,
people behave as if rare events had much less impact than they would objectively deserve

Question 35

Ch2

Hot Decisions

Answer 35

-Hot processes: how emotions and feelings influence judgments and decisions
-affect impacts decisions
-Lerner: 2 themes of affective influences on decision-making:
1. integral effect of emotions on decision-making (the
effect of emotions that arise directly from the choice at hand)
2. influence of incidental emotions (emotions
unrelated to the decision, having a carry-over effect on choices)

Question 36

Ch2

Predicted Emotions

Answer 36

-positive or negative outcome of a decision can profoundly affect
the decision-maker’s feelings after a decision
-negative emotions tend to call for specific action
tendencies -> narrows an individual’s momentary action repertoire
-positive emotions broaden an individual’s action repertory
positive emotion: from feeling good, no specific action follows.
-even affective states
of the same valence can have distinct influences on decision-making

Question 37

Ch2

Risk-as-Feelings and the Affect Heurisitc

Answer 37

-two principled ways in which affect and emotion
can influence decision-making:
1. as anticipated emotions: predictions about
the emotional consequences of a decision
2. as immediate emotions which are experienced at the time of decision-making

-Risk-as-feeling hypothesis: risk is not calculated, but
felt – as an immediate visceral reaction, respond to factors that do not enter into cognitive evaluations -> emotional reactions to risks that can diverge from cognitive evaluations of the same risks
= affect heuristic: reliance on such feelings, allows quick decisions based on current, negative/positive affect

-The affect-as-information model: affect has informational value
-> in high levels of emotion, the direct effect is detrimental as it overrides cognition: individuals are ‘out of control’ acting against their own self-interest
-> vary depending on the qualitative character of the emotion, that is, the different action-tendencies
evoked by different emotions.

Question 38

CH2

Scope Insensitivity

Answer 38

-Valuation depends on whether people are in a ‘feeling’, or a ‘calculative’ thought mode
-Valuation by calculation = process that relies on some sort of algorithm that takes into account the nature of the stimulus and its scope (show sensitivity to scope)
-Valuation by feeling relies on a gut feeling about the stimulus but ignores its size (they are sensitive to only basic differences in scope but are largely insensitive
to further variations of scope)
-Thinking in the calculative mode -> can make people less receptive to other people’s suffering (e.g. genocide)

Question 39

Ch2

Empathy gaps

Answer 39

-Predicting future feelings following from a decision can be especially difficult if these
feelings are different from the current feelings

= empathy gaps
two variants:
(1) intrapersonal empathy
gaps (predicting how one would feel in a different situation)
(2) and interpersonal
empathy gaps (predicting how others would feel)

-empathy gaps have two generic forms: hot-to-cold empathy gaps, and cold-to-hot empathy gaps
-In hot-to-cold empathy gaps, people who are in emotional (i.e., hot) states tend to underestimate the extent to which their predicted preferences are under the influence of their present emotional state
-In cold-to-hot empathy gaps, people are not currently affectively aroused, but
have to predict their behaviour in arousing situations (example of a cold-to-hot empathy gap is substance abuse)
-Empathy gaps can specifically influence situations that involve
intense emotion