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Flashcards in Deviations from the normative theory Deck (18)
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The endowment effect

Effect of personal ownership of an item
people demand more to give up an object than they would be willing to pay to acquire it


The endowment effect - wine

A professor brought wines for prices up to 35 dollar but wouldn't sell them for less than 100 dollars


Where is the endowment effect not seen?

Normal trading - buying shoes - if you own shoes to sell them, you have no attachment to them


Experimental demonstration of the endowment effect?

Half given a 6 dollar mug, then asked to name a selling price, half are buyers who have to bid with their own money

sellers - want double the price

this effect smaller in the UK than in the US



People don't use these very well
the way it is worded, effects how they interpret it
people make decisions that aren't equal to probabilities


What are small probabilities?

These are ignored, but if they are not they are overweighted

people are confused about the outcome


Allais paradox

This is another way where you see deviation in peoples behaviour from what utility theory believes

when gambles are combined, the probabilities of the outcomes move along the distorted value scale


Mental accounting

We allocate resources to different accounts and reason about loses and gains within particular accounts


Example of mental accounting

As you enter the theatre, you realise you have lost 10 dollers, wold you still pay 10 for a ticket?
yes - 88%

you have already paid 10 for the ticket, as you enter, you realise you have lost the ticket, would you pay for another?
yes - 46%

loss is the same, but in the second case, you have already spent that money on the ticket so don't want to allocate more


What is a sunk cost?

Once you have spent money on something, there is nothing you can do about it

different perspectives on sunk costs

should look at inclusive accounts to have better decisions



The way you present something effects your decisions


Framing in a real context

two treatments
one month survival rate for surgery is 90%
10% mortality in first month
84% vs 50% said they would favour surgery, given the descriptions


The Asian flu problem

Choose between two programs
gains version presented in terms of lives saved - save 200 people or one third chance of saving 600 people, two thirds of saving none
losses version, terms of lives lost
400 people die, or one third of a chance that no one dies

gains - version a preferred
losses - version b prefered
but they are the same in two versions - people prefer the sure thing for good outcomes, but prefer the risky outcome for bad options


Joint evaluation

Judgements made in single evaluations compared with joint are not always consistent


Donations example

Donations to help dolphins vs to help farmers as skin cancer victims - on their own, same money but when together, the second case is more worthy


How does the way information is presented have an impact?

Gigerenzer argues that information about risk is often presented in a way that makes it difficult to assess - e.g. proportions and percentages

people are better at dealing with frequency information, rather than probabilities, these are misleading


Diagnosis example - probabilities

Doctors misjudge the probability of someone getting a disease

but if given frequencies, get a better conclusion and the right one


Organ donation

Whether you consent to be an organ donor can be framed as:
an opt in choice - carry a card, only if you agree
an opt out choice - carry a card, only if you want not to be one

opt in vs opt out question can change rates a lot - from 86% in Sweden to 4% in Denmark