Chapter 9

Question 1

Rational Behavior

Answer 1

Objective and in accordance with reason and logic

Question 2

Psychological bias

Answer 2

psychological factors affect our decision making

Question 3

Irrational Behavior

Answer 3

Subjective and emotional

Question 4

Predictably irrational

Answer 4

our errors as humans are systematic and reliable

Question 5

Thinking fast (system 1)

Answer 5

Decision making that operates quickly with little effort and less control
ie. daily processes

Question 6

Thinking slow (system 2)

Answer 6

Decision making that operates more slowly with more effort and deliberate control
-idling in the background until it needs to resolve what system 1 can’t

Question 7

Anchoring

Answer 7

Different starting points or initial values produce different estimates or decisions ie.
87654….1 people more likely to estimate larger end number
vs.
12345….8
-Even if you are aware of anchoring you can still suffer from the bias

Question 8

Decoy effect

Answer 8

using a more or less expensive item as an anchor to stimulate the sale of a target item
ie. a cheaper wine to sell more of an expensive wine
ie. a more expensive item to sell more of a less expensive appliance

Question 9

Law of sample size

Answer 9

Small sample sizes have more variance

Question 10

Base Rate Frequencies/prior probabilities

Answer 10

How often an event or situation actually occurs

Question 11

Representativeness Heuristic

Answer 11

Used to estimate the likelihood of an event based on how closely it matches or represents related examples or stereotypes in mind
- often ignore base-rate probabilities when given more descriptive information ie. Linda

Question 12

Availability Heuristic/bias

Answer 12

Estimating the frequency of an event based on how easily examples come to mind
ie. estimate more shark attacks than skin cancer; shark attacks receive more media coverage

Question 13

Recognition Heuristic

Answer 13

selecting the most recognizable item in a set
ie. in guessing which Italian city is most populated: likely to select city that you recognize

Question 14

Fluency heuristic

Answer 14

assign higher value to option that is recognized fire/more quickly/easily

Question 15

One-clever-cue heuristic

Answer 15

Making a decision based on a single cue ie. price, closest location

Question 16

Take the best cue heuristic

Answer 16

Making a decision based on considering each cue in a sequential order
ie. start with all phone under $200, then best battery life, then color, etc.

Question 17

Conjunction Fallacy

Answer 17

False assumption that a combination of conditions is more likely than either condition by itself
ie. Linda is more likely to be a bank teller and a feminist based off her description than just a bank teller

Question 18

Gambler’s Fallacy

Answer 18

Faulty reasoning that past events in a sequence affect the likelihood of future events
ie. keep getting heads when flipping a coin and think that the next flip is more likely to be a tail

Question 19

Hot Hand Effect

Answer 19

Perception of being “on a roll”
ie. gambling or keep making basketball shots
-people seek patterns even when none exist, inferring causes to explain random events

Question 20

Deliberation-without-attention effect

Answer 20

Consciously make a decision but unconscious processes help you come to it
ie. sleeping on it

Question 21

Less-is-more effect

Answer 21

Too much deliberation devoted to a problem leads to less accurate, sensible, or satisfying decisions

Question 22

The endowment effect

Answer 22

We tend to give higher values to items we own
-ie. would sell items for more money than if you were to buy it
-explained in terms of loss aversion

Question 23

Loss aversion

Answer 23

We would rather not get a benefit than risk losing something we already have
ie. keeping on old computer as a backup when you could sell it and get money

Question 24

Status Quo bias

Answer 24

preference for the current state of affairs

Question 25

Transaction Costs

Answer 25

timer, effort, and resources needed for change ie. have to clear computer, post ad, and meet up in order to sell it

Question 26

Optimal defaults

Answer 26

Automatically placing people into options that have the greatest benefits ie. employer automatically contributes a portion of employe's paycheck to 401K and matches it after they have worked there for 1 year - but they can opt out of they want ie. automatically placed as organ donor but can opt out

Question 27

Sunk Cost Effect

Answer 27

Tendency to continue a task once investing time, energy, and resources -resistence to change or attachment to money or time invested makes people actually lose more by continuing

Question 28

Risk Aversion Strategy

Answer 28

Used when problem is stated in terms of gains; people are less likely to choose a riskier option than an option but definite gain ie. you will for sure save 2000 people-more likely to choose this option

Question 29

Prospect Theory

Answer 29

When evaluating gains, people are risk aversive; they would rather take a sure gain than a risky option for slightly more money When faces with sure loss: people become risk seeking; they are willing to lose more if it allows them a small chance of avoiding any loss

Question 30

Risk Taking Strategy

Answer 30

Used when problem is stated in terms of losses; people are more likely to choose a riskier option than an option with definite loss ie. 2000 people will for sure die; more likely to choose riskier option with chance for some people to survive

Question 31

The Framing Effect

Answer 31

Framing a choice within a positive (ie. saving patients) vs a negative (leaving patients to die) alters the evaluation process -people tend to favor riskier options with more variation under negative scenarios

Question 32

Utility

Answer 32

the satisfaction and subjective reward obtained from making a decision

Question 33

Positive Utility

Answer 33

Gains from a decision

Question 34

Negative Utility

Answer 34

Losses or costs from a decision

Question 35

Expected Value

Answer 35

The lucrativeness (profit) of an option; value*probability ie. option a: 5% chance of winning $1000; expected value = $50 (.05*1000=50) option b: 95% chance of earning $100; expected value = $95 (.95*100=95)

Question 36

Rational Choice Theory/Classic economic theory

Answer 36

We make decisions based on the expected value of our options; should choose options with higher utility

Question 37

Descriptive Theories

Answer 37

How we actually make decisions based on beliefs and preferences and not how things "should be" as described in rational choice and normative theories

Question 38

zero price effect

Answer 38

enticement of free option or item

Question 39

Neuromarketing

Answer 39

Using brain scanning to predict product preferences ie. while watching an ad, EEG can provide an ongoing measure of when people tune in or out