19.+Decision+making

April 28, 2015
 * 19. Decision making**

Anchoring and adjustment Default bias Framing Your studies Endowment effects
 * Outline**

Allen Heckard attempted to sue Michael Jordan and Nike founder Phil Knight for $832 million. He claimed he'd suffered defamation, permanent injury and emotional pain and suffering because people often mistook him for the basketball star. (he dropped the law suit eventually) Anchoring - tendency to use the first-available estimate as a reference point, or anchor, for the final estimate Adjustment - adjusting from starting point (anchor) based on additional info. The problem: insufficient adjustment Applications of anchoring
 * This is an example of anchoring
 * The initial claim is an anchor
 * Making ridiculously high claims actually works to help you get more money.
 * Anchoring and adjustment**
 * Examples from class:
 * Did Mahatma Ghandi live beyond age 140/age 9?
 * Age 140 anchor: class said 84
 * Age 9 anchor: class said 74
 * What is 1x2x3x4x5x6x7x8 vs. 8x7x6x5x4x3x2x1
 * Class said: 18,400 vs. 32,000
 * Buying cars - seller shows you an absurdly expensive, sad-looking car. Afterwards, everything else looks like a good deal.
 * Menus - put something extremely expensive at the top so everything else looks like a good deal
 * Englich et al. (2006): Are experts influenced by anchors?
 * Judges read a shoplifting case. Defense suggests 1 month probation.
 * Prosecutor suggests one of two sentences:
 * 9 months on probation
 * 3 months on probation
 * Judges (experts) in the 9 month condition gave longer sentences than did those in the 3 month condition
 * Anchoring and adjustment affects experts too
 * Stewart (2009): Participants see a mock credit-card statement for $435.76
 * Group 1: "Minimum repayment is $5.42."
 * Group 2: No minimum
 * They are asked how much they would pay this month
 * Participants in group 1 paid less when they anchored on a low number (the minimum balance)

Organ donation
 * Default Bias**
 * Rates of donation:
 * United States: 28%
 * France: 99.9%
 * Not donating is the default in the US
 * European countries provide a naturalistic study
 * Donating is the default in some countries
 * Not donating is the default in others
 * The default heuristic
 * If there is a default, don't take action
 * Thus, organ donation rates are low in the US
 * Slightly different mechanism than anchoring and adjustment (laziness?)

Framing effect - you can ask basically the same question in different ways and get different answers Summary of framing effects:
 * Framing**
 * Examples from class:
 * Gain frames are more appealing than loss frames
 * Imagine you work in a medium sized company trying to decide how to invest $10,000. You have just learned about a new stock market fund. What percent of this would you invest in the stock market fund?
 * In the last 5 years, it has outperformed 90% of its competitors (Class said: 63%)
 * In the last 5 years, it has been outperformed by 10% of its competitors (Class said 51%)
 * When framing changes the percentage saved, it can change your decision making
 * You're about to buy headphones for $20.00. Would you drive to a store 20 minutes away to get the same headphones for $10.00?
 * 62% of the class said yes
 * You're about to buy speakers for $145.00. Would you drive to a store 20 minutes away to get the same speakers?
 * 21% of the class said yes
 * Gain frames vs. loss frames affect desire for risk
 * Assume yourself richer by $300. Which of these two options would you choose?
 * A) A sure gain of $100
 * B) $50% chance to gain $200 and 50% chance to gain nothing
 * 73% of class said A
 * Assume yourself richer by $500 than you are today. Which of these two options would you choose?
 * A) A sure loss of $100
 * B) 50% chance to lose nothing and 50% chance to lose $200
 * 53% of class said A
 * When choosing between gains (gain frame)
 * We are risk-averse: prefer sure gain over risk
 * When choosing between loses (loss frame)
 * We are risk-seeking: prefer risk over sure loss
 * Shafir & Tversky (1995)[[image:pens.png width="325" height="225" align="right"]]
 * Group 1: 2 choices
 * An elegant Cross pen
 * $6
 * Group 2: 3 choices
 * An elegant Cross pen
 * $6
 * An inferior pen
 * People were more likely to choose the nice pen if they saw the inferior pen as well
 * If we were rational, the inferior pen would not affect how much we value the nice pen
 * Gain versus losses
 * "Better than 90%" vs. "worse than 10%"
 * Context
 * "$10 off $20" vs. "$10 off $145"
 * Nice pen vs. nice pen next to bad pen
 * Risk
 * We embrace sure gains, avoid sure losses

Kahneman, Knetsch, & Thaler 1990: Endowment effect - you place more value on things you own Heberlein & Bishop (1985): Participants wanted a hunting permit Ariely & Carmon 1994: 100 participants had entered a lottery for the right to buy tickets to the NCAA final four
 * Endowment Effect**
 * Sellers group
 * You can keep this mug
 * How much would you sell it for?
 * Buyers group
 * Here's some cash. Look at this mug.
 * How much would you pay to buy it?
 * Seller group said $7.12. Buyer group said $3.12
 * This relates to loss aversion
 * Permit owners: would sell for $143
 * Permit seekers: would buy for $31
 * Assuming you had a ticket, what's the lowest price you'd sell it for?
 * $2,411
 * Assuming you didn't have a ticket, what's the highest price you'd pay for one?
 * $166

Mental Accounting
 * Tversky & Kahneman (1981)
 * Imagine that you have decided to see a play and paid the admission price of $10 per ticket. As you enter the theater you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay $10 for another ticket?
 * 46% said yes. 54% said no
 * Imagine that you have decided to see a play where admission is $10 per ticket. As you enter the theater you discover that you have lost a $10 bill. Would you still pay $10 for a ticket for the play?
 * 88% said yes. 12% said no.
 * In both cases, you lost something worth $10, and then had to decide whether or not to buy a ticket.
 * Sunk cost: an investment (money, time, emotion) that you can't get back.
 * Shouldn't affect decisions but does
 * Examples from your life?
 * "Getting your money's worth"
 * Sit through a terrible movie
 * Finish a meal you don't really want