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Earn Ten Cents Extra!
How painful isyour choice to
FOREGO
gaining 10 cents?
How motivated can you be by a dime?
Pay for a Dime Bag?
Doesn’t it FEEL different to pay 10 cents?
A loss hurts much more than not getting that same dime
Reference Point Changes a Gain to a Loss
It FEELS much different to avoid a loss than to forego an additional gain
Reference Point Changes a Gain to a Loss
It FEELS much different to avoid a loss than to forego an additional gain
Losses approximately 2X as aversive as comparable gain
What’s killing our farmers?
Out of the 3,141 counties in the US:
Highest kidney cancer rates found in the following counties:
Sparsely populated, primarily rural
Preponderantly Christian, more evangelical
Inland, remote from metropolitan coasts
Midwest, the South, and the West
Explanatory Hypotheses?
What’s saving our farmers?
Out of the 3,141 counties in the US:
Highest kidney cancer rates found in the following counties:
Sparsely populated, primarily rural
Preponderantly Christian, more evangelical
Inland, remote from metropolitan coasts
Midwest, the South, and the West
“The Law of Small Numbers”: often the best explanation, but we’re fooled by randomness
Fools for a Good Story
Michotte The Perception of Causality http://cogweb.ucla.edu/Discourse/Narrative/michotte-demo.swf
Why do extremely smart women often choose less intelligent partners?
Can a great college athlete do anything to deflect the Sports Illustrated curse?
Why do extremely smart women often choose less intelligent partners?
Can a great college athlete do anything to deflect the Sports Illustrated curse?
Why did the Gates Foundation invest ~$2 Billion to support smaller class sizes?
Regression to the Mean
Why do extremely smart women often choose less intelligent partners?
Can a great college athlete do anything to deflect the Sports Illustrated curse?
Why did the Gates Foundation invest ~$2 Billion to support smaller class sizes?
Separate Evaluation vs Joint
Music Dictionary A10,000 entriescondition is like new
Music Dictionary B20,000 entriescover is torn
24 Piece China Setcondition is like new
28 Piece China Set24 Pieces 4 extra saucers, 1 chipped
Separate Evaluation vs Joint
Music Dictionary A10,000 entriescondition is like new
$24
Music Dictionary B20,000 entriescover is torn
$20
24 Piece China Setcondition is like new
28 Piece China Set24 Pieces 4 extra saucers, 1 chipped
>
Presentation Paradox
People will pay more for a 5 ★ Hotel
than they will offer for
5 ★ Hotel that also mentions a 3 ★ Restaurant
Experiencing vs Remembering Self
Which person suffered more? A or B
Which person more willing to do it again? A or B
Equal Area in Box
Peak-End Rule (Kahneman)Duration Neglect: Difficulty estimating the total amount of suffering
Peak-End: Simple heuristic to recall the worst instant (peak) + the last instant (end)
Cognitive manipulation: Increase total quantity, but make last minutes less intense. Longer period is recalled as less painful
Equal Area in Box
Cognitive Illusions: General features & Patterns
We’re not performing mathematical/logical computations
Heuristics work as quick rules of thumb Law of Small Numbers - patterns w/o sensitivity to sampling
Presentation Paradox - Single composite/gestalt stands for the sequence
Peak-end rule - 2 points replace integrating under curve
Two System Theory
Fast Thinking: intuitive, immediate, unreflective
Perception of patterns comes for free
Slow Thinking: mathematical/logical computations
If a baseball and a bat cost $1.10 together, and the bat costs $1.00 more than the ball, how much does the ball cost?
General features of Prospect Theory (K&T ’79)
Status quo bias (connected to power of defaults)
Diminishing sensitivity
Losses weigh much heavier than foregone gains
Save More Tomorrow program – Allocate future raises
Risk averse for gains
Risk impulsive for losses
Reference point - SQ
Future gains - relative size makes it feel much less attractive
Loss / Setback / Backward move: Same amount looms larger
General features of Prospect Theory (K&T ’79)
Status quo bias (connected to power of defaults)
Diminishing sensitivity
Losses weigh much heavier than foregone gains
Save More Tomorrow program – Allocate future raises
Risk averse for gains
Risk impulsive for losses
Zoom into origin region to explore sensitivity to probabilities (0,1)
Probability Weights +Certainty Effect
0 0
1 5.5
2 8.1
5 13.2
10 18.6
20 26.1
50 42.1
80 60.1
90 71.2
95 79.3
98 87.1
99 91.2
100 100
WeightProbability
Probability Weights +Certainty Effect
0 0
1 5.5
2 8.1
5 13.2
10 18.6
20 26.1
50 42.1
80 60.1
90 71.2
95 79.3
98 87.1
99 91.2
100 100
WeightProbability
1- Over Sensitive to Low Probabilities
Probability Weights +Certainty Effect
0 0
1 5.5
2 8.1
5 13.2
10 18.6
20 26.1
50 42.1
80 60.1
90 71.2
95 79.3
98 87.1
99 91.2
100 100
WeightProbability
1- Over Sensitive to Low Probabilities
2- Less sensitive to Shifts in the Middle
3- Increasing Sensitivity to Higher
Probability Weights +Certainty Effect
0 0
1 5.5
2 8.1
5 13.2
10 18.6
20 26.1
50 42.1
80 60.1
90 71.2
95 79.3
98 87.1
99 91.2
100 100
WeightProbability
1- Over Sensitive to Low Probabilities
2- Less sensitive to Shifts in the Middle
3- Increasing Sensitivity to Higher
4- Extraordinary weight to certainty
Follow up ReferencesThe ultimate book of optical illusions / Al Seckel. [Any illusions book is worth *a look*]
Predictably irrational : the hidden forces that shape our decisions / Dan Ariely. THE gateway drug to the field. Very witty pleasurable read by one of the leading researchers. Also take 18 minutes to watch at lease one of his superstar TED talks.
The why axis: hidden motives & the undiscovered economics of everyday life / Uri Gneezy Applications to public education, carpooling, sex differences, showing how experiments work to help answer open questions of about the best approach to messy situations
Misbehaving : the making of behavioral economics / Richard H. Thaler Humorous anecdotes trace the origins of the field to original insights into how humans "misbehave."
Thinking, fast and slow / Daniel Kahneman. Comprehensive - clear & concise; a stealth-text book of the entire field by one of its founders.