Session 3 : The risk perception trap & the inertia trap Flashcards
(12 cards)
What is inertia in decision-making ?
Inertia is the tendency to stay in a current state or continue existing behaviors unless compelled to change. People often follow the default option.
Example: People are more likely to donate organs if it’s the default option after a car accident, rather than opting in voluntarily.
N.B : Unless someone has a strong opinion, they are likely to stick with the default option
What is the sunk cost fallacy ?
The sunk cost fallacy is when people continue with a decision because of past investments, even if it’s no longer the best option.
Example: A person buys a concert ticket but gets sick. They still attend the concert because they don’t want to waste the money.
N.B : Older individuals are less likely to fall for the sunk cost fallacy compared to younger ones
What is status quo bias?
It is a preference for the current state over change, even when the change would be better.
Example: A school continues allocating 80% of its budget to traditional classroom teaching, even though technology requires a new allocation strategy.
N.B : Anchoring and inertia reinforce status quo bias, making people resistant to change
What are regret avoidance and blame avoidance, and how do they relate to status quo bias ?
Regret avoidance: Fear of missing out on a better option.
Blame avoidance: Fear of being blamed for making a different choice than expected.
Example : A person might attend a social event they didn’t plan on just to avoid the regret of missing something important.
N.B : These biases cause people to follow conformity and avoid standing out, leading to a resistance to change
How do people perceive risks, and does everyone have the same risk tolerance?
Risk perception varies depending on the situation and consequences. People are neither inherently risk-averse nor risk-seeking.
N.B : Loss aversion makes people more sensitive to losses than to gains of the same amount
What is loss aversion ?
Loss aversion is the tendency to feel more pain from losing something than pleasure from gaining something of the same value.
Example: A company head prefers to avoid a small loss, even if there is a significant gain opportunity, due to fear of employee revolt.
N.B : Loss aversion varies based on social environments. For example, African communities, which have stronger social nets, tend to be less affected by loss aversion than individualistic European societies
What is zero-risk bias ?
People prefer options that eliminate a tiny risk entirely, even if other choices reduce risk significantly without fully removing it.
Example: A person chooses an expensive insurance policy that covers all risks, rather than a cheaper one that covers most but not all risks
What is anchoring in decision-making ?
Anchoring is when people rely too heavily on the first piece of information they receive, which influences subsequent judgments.
Example: At a car dealership, seeing a $100,000 car anchors a buyer’s expectations, making $50,000 seem reasonable, even if it’s outside their budget
What is escalation of commitment ?
It’s when individuals or organizations increase their commitment to a losing course of action, often because of the resources already invested.
Example: A country continues fighting a costly war despite high casualties to avoid admitting that the effort has been in vain
Disruption and Underreaction
How does inertia contribute to underreaction to disruption?
Inertia causes individuals and organizations to react slowly to disruptive changes, which can harm them.
Example: A traditional taxi company that doesn’t adapt quickly to ride-sharing apps loses customers as a result
What is uncertainty aversion, and how does it influence decision-making?
People prefer certain outcomes, even if they are less favorable, over uncertain outcomes that might be better but carry more risk.
Example: Someone prefers a stable job with a fixed salary over starting a business with potentially higher earnings but more uncertainty
What is hindsight bias ?
Hindsight bias is when people view events as more predictable after they have occurred than they were beforehand.
Example: After Donald Trump’s election, many people who claimed it was impossible later provided explanations that made it seem inevitable
