Lecture unit 1

Question 1

Economic view of preferences?

Answer 1

Each individual has stable and coherent preferences

• each is assumed to rationally maximise the expected value of utility

Question 2

What is the idea behind reference levels?

Answer 2

• Humans are more sensitive to changes than to absolute levels,
• affecting the utility of product/service that may also depend on a reference level (determined by factors such as past consumption or expectations of future consumption

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Question 3

Loss Aversion Theory by Kahneman and Tversky

Answer 3

• People are more averse to losses than attracted to same-sized gains,
• leading to risk aversion and value function changes at the reference level.

Question 4

What is risk aversion?

Answer 4

displeasure from monetary loss is greater than the pleasure from a same-sized gain

Question 5

What is the Endowment effect?

Answer 5

• The tendency to overvalue something we own, regardless of its objective market value
• explained by loss aversion.
  –>greater value when owned, especially true for symbolic, experiential or emotional significance

Question 6

What is the status quo biases?

Answer 6

• A preference for the current state or status quo to changes
• changes involving losses are avoided even if compensated by gains

–>arises from the concept of loss averision

Question 7

What is simple alturism perspective?

Answer 7

• People value the well-being of others, affecting behavior and welfare with concern for others
• give surplus to the person who is poorer/who values the goods more
• maximal benefits criterion

–>People put positive value on the well-being of others

Question 8

What is behavioral distributive justice?

Answer 8

Examines how people divide resources, incorporating self-interest sacrifice for fairness principles.

Question 9

Behaviroral distributive justice:
What are the two perspective?

Answer 9

• Simple altruism perspective: maximal benefits criterion: give the surplus to ther person who is poorer/who values the goods more
• Alternative norms: 50/50 splitting of resources, maximin criterion

Question 10

Maximal benefits vs. Maximin Allocation

Answer 10

Choice between

• maximizing total welfare gains or
• equalizing welfare gains in resource distribution.

Question 11

What are the characteristics of everyday economic fairness judgments?

Answer 11

• Are more complicated
• Reference levels are crucial
• People’s general perceptions of fair behavior may adjust over time
• People seem to implicitly (but pervasively) consider equitable sharing (fair distribution) over changes in total endowments, not total endowments (total amount of each person) themselves

Question 12

What influences social preferences over other people’s consumption? And what is Altruism directed to whom?

Answer 12

Social Preferences Influences:
- Social preferences are affected by the behavior, motivations, and intentions of others.
- Altruism is directed towards those perceived as deserving, while there’s often indifference towards those deemed undeserving

Question 13

What is Reciprocal Altruism ? context example: conserving water

Answer 13

Reciprocal Altruism:

• Actions, like conserving water during a drought, are driven by a desire to contribute to the general good
• This illustrates reciprocal altruism where actions benefit all, including oneself indirectly.

Question 14

What is reciproral alturism vs. simple altruism? (Conservation of water example)) What happens in both, when you hear that other do not preserve water?

Answer 14

Simple Altruism vs. Reciprocal Altruism:

In simple altruism,
- learning that others do not conserve might lead one to increase their conservation efforts,
- contrary to reciprocal altruism and against common intuition and evidence.
- This highlights a nuanced view of altruism based on perceived collective effort and individual responses to it

Reciprocal Altruism
— conservation contributes to the general good
— social benefits of conservation diminish
— based on mutual benefit, you conserve water, you might expect others to do the same

Question 15

How does the role of volition affect perceptions of generosity?

(What do people differentiate between generosity acts)

Answer 15

Role of Volition in Reciprocity:

• People distinguish between acts of generosity that are chosen freely and those compelled by circumstances

Question 16

What shapes our interpretation of someone’s motives?

(How do beliefs about consequences influence reciprocity?)

Answer 16

The interpretation of someone’s motives is shaped
- by our beliefs about their understanding of the consequences of their actions

• Recognizing intentional generosity influences reciprocity.

Question 17

How do beliefs about economic context influence reciprocity? (Wages firms, employees)

Answer 17

• Firms may offer higher wages as a gesture of generosity, hoping employees will reciprocate with greater effort.
• Employees are likely to respond positively to what they perceive as voluntary generosity from employers, enhancing their effort as a form of reciprocity

Question 18

What are cognitive biases in judgment? (definition)

Answer 18

are systematic patterns of deviation from norm and/or rationality in judgment.

Question 19

Which biases make people departure from perfect rationality?

Answer 19

• Anchoring and adjustment bias
• Representativeness Heuristic
• Availability Heuristic
• The Law of Small Numbers
• Belief Perseverance and Confirmatory Bias

Question 20

What is anchoring and adjustment bias?

Answer 20

• Consumers perceive new information through an essentially warped lens
• Undue emphasis on statistically arbitrary, psychologically determined anchor points

Question 21

What is representative heuristic?

Answer 21

• Over reliance on perceptions of stereotypical groups
• Things/ events are assumed to be correlated more closely than they actually are.

Question 22

What is availability heuristic?

Answer 22

• Over reliance on readily available information
• Misjudgment of risks
• Assessment based on false assumptions

Question 23

What is the law of small numbers?

Answer 23

People exaggerate how closely a small sample will resemble the parent population from which the sample is drawn

Question 24

The law of small number: What is the gambler´s fallacy?

Answer 24

• If a fair coin has not come up tails for a while, then on the next flip it is “due” for a tails
• People over-infer the probability distribution from short sequences

Question 25

THe law of small numbers: What is the misinterpretation of regression to the mean?

Answer 25

• As people read too much into patterns that depart from the norm,
• they don’t expect that further observations will look more normal

Example: Hospital large and small, Respondents stated that both hospitals will have the same male average distribution…

Question 26

What is belief perseverance?

Answer 26

Belief Perseverance:
- The tendency to maintain one’s initial beliefs even after they have been shown to be false

• People often ignore new information that contradicts their existing beliefs, rather than misinterpreting it

Question 27

What are belief perseverance types?

Answer 27

Types include:
- self-impressions (beliefs about oneself),
- social impressions (beliefs about others), and
- social theories (beliefs about the social world)

Question 28

How can belief perseverance be reduced?

Answer 28

Overcoming Belief Perseverance:
- belief perseverance is a challenging bias to overcome because it involves deeply held beliefs

• Awareness of this bias is the first step towards mitigating its effects
• Actively thinking of and seeking out explanations or evidence that supports the opposite belief can help in reducing the impact of belief perseverance

Question 29

What is confirmatory bias/confirmation heuristic?

Answer 29

• People tend to misread evidence as additional support for initial hypotheses
• Tendency to search for, interpret, favor and recall information in a way that affirms one‘s prior beliefs and hypotheses

Question 30

When is confirmatory bias stronger?

Answer 30

• stronger effect for desired outcomes and emotionally charged issues

Question 31

What is polarization?

Answer 31

Providing the same ambiguous information to people who differ in their initial beliefs on some topic can move their beliefs further apart

Question 32

What is hindsight bias?

Answer 32

• People exaggerate the degree to which their beliefs before an informative event would be similar to their current beliefs.
• People tend to think they “knew it would happen all along”

Question 33

What is overconfidence bias?

Answer 33

• Overconfidence bias is a tendency to hold a false and misleading judgement of our skills, intellect, or talent
• Can be dangerous

Question 34

What is the biases in judge,ent of silent memories?

Answer 34

• People disproportionately weigh salient, memorable, or vivid evidence even when they have better sources of Information
• E.g. assessment of a city’s given crime rate, difficulties with a certain car brand

Question 35

What is “head-clutching behavior” in the context of decision-making errors?

Answer 35

• Refers to the reaction of realizing a mistake after the fact, often expressed as “How could I have missed that?”
• Emphasizes that people can still make errors despite being aware of biases and statistical truths.

Question 36

What are errors of application in learning and expertise in eliminating biases?

Answer 36

• Head-clutching behavior: “How could I have missed that?”
• Even if people learn the relevant statistical truths of their environment, they may continue to make errors in their judgments and decision making in every single case.

Question 37

How can “learning” and resoning exacerbate errors? ( experts, individuals)

Answer 37

• When predictability is low, experts can become more susceptible (anfällig) to overconfidence than laypersons
• The act of reasoning can increase subjects’ overconfidence regarding their predictions of their own behavior
• indicating that expertise and detailed analysis sometimes lead to greater confidence, not necessarily greater accuracy.

Question 38

What is the difference between simple altruism and reciprocity altruism?

Answer 38

Simple altruism motivated by pure selflessness and the inherent value of helping, regardless of others actions

Reciprocal Altruism motivated by the expectations of mutual benefit, idea: I help them, they help me

Question 39

When does representative heuristic occur and confuses ,Managers?

Answer 39

• bias occurs when the similarity of objects/events confuses manager‘s thinking regarding the probability of an outcome