Chapter 5 Flashcards
(12 cards)
What is Framing, and how does it influence decision-making?
Framing refers to how different wordings or presentations of the same information can significantly change people’s decisions. Rationally, framing should not affect decisions, but in practice, the way information is presented often strongly influences choices, revealing biases in human judgment.
How does Expected Utility Theory differ from expected monetary value?
Expected Utility Theory, proposed by Daniel Bernoulli, suggests that people make decisions based on the expected utility (satisfaction or benefit) of an outcome, not just its monetary value. Each outcome has a utility value, which is weighted by its probability. People aim to maximize their utility, though they may not always act purely on financial value.
How does Prospect Theory explain the influence of framing on decision-making?
Prospect Theory, developed by Daniel Kahneman and Amos Tversky, shows that individuals view gains and losses differently, treating risks related to gains more conservatively and losses more riskily. By changing the frame, or perspective, on a problem, people’s risk preferences can shift, leading to different decisions.
What role does the reference point play in framing?
The reference point is the baseline against which gains and losses are measured, influencing whether a decision is framed as a potential gain or loss. This framing affects people’s risk preferences, as they tend to avoid risk when viewing a choice as a gain but accept more risk when it is framed as a loss.
What is the Certainty Effect, and how does it affect decision-making?
The Certainty Effect describes people’s preference for certainty over high probability. They value actions that completely eliminate a risk more than those that simply reduce it, even if the actual probability difference is the same. This often leads to overvaluing certain outcomes and underestimating near-certain ones.
How does the Pseudocertainty Effect relate to decision-making?
The Pseudocertainty Effect occurs when people treat options that reduce uncertainty as if they offer certainty. This preference for assured outcomes over partially reduced risks often leads people to make inconsistent decisions, overvaluing options that provide a sense of certainty.
How does framing influence the appeal of insurance?
Framing insurance premiums as a “certain loss” instead of a “protective premium” can make insurance less attractive. When insurance is framed as protection or prevention, social norms and emotional responses make it seem more appealing, even if the rational benefit is the same.
What are Reservation Prices, and how do they demonstrate framing effects?
Reservation Prices are the prices consumers are willing to pay based on context, influenced by both acquisition utility (actual value of a good) and transactional utility (perceived value of the deal). For instance, a beer may seem more expensive at a hotel than at a grocery store, even if it’s the same product, because framing affects perceived worth.
What is the Endowment Effect?
The Endowment Effect is the tendency to value owned items more than unowned items. This effect explains why people often demand more to sell an item they own than they would be willing to pay to buy it, as ownership adds a sense of attachment and value.
How does Mental Accounting influence satisfaction with outcomes?
Mental Accounting is the way people categorize financial gains and losses in their minds, affecting satisfaction. For example, receiving one fine of €200 may feel less negative than receiving two fines of €100 each because people mentally tally the losses differently.
What impact does Rate/Bonus Framing have on spending behavior?
Framing financial gains as “bonuses” rather than “rebates” encourages spending rather than saving. For instance, labeling government payments as “bonuses” leads to greater consumer spending, as people view bonuses as expendable money, whereas “rebates” are associated with saving.
What is Joint-Versus-Separate Preference Reversal?
Joint-Versus-Separate Preference Reversal describes the phenomenon where people’s preferences change depending on whether options are presented individually or side-by-side. For instance, they may prefer a growing salary year over year individually, but when compared side-by-side, they might favor a higher starting salary, even if it decreases over time.
