1. Cognitive Limitations and Consumer Behavior
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2. Drawing on Chapter 8
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3. Overview Choice Under Uncertainty Bounded Rationality
Reasons for Non-Utility-Maximizing Behavior
Loss Aversion
Acting on Sunk Costs
Explicit vs. Implicit Opportunity Costs
Affective Forecasting Errors
Judgmental Heuristics And Biases
The Psychophysics Of Perception
The Difficulty Of Actually Deciding
The Self-control Pitfall
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4. Choice Under Uncertainty
(Experimental results)
Problem 1: choose between
A: A sure gain of $240 (84%)
B: A 25% chance of getting $1000 and a 75% chance of getting $0. (16%)
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5. Figure 8.5: A Risk-Averse Person Will Usually Prefer a Sure Gain to a Lottery with Slightly Higher Expected Value
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6. Choice Under Uncertainty
Problem 2: choose between
C: A sure loss of $750 (13%)
D: A 75% chance of losing $1000 and a 25% chance of losing $0. (87%)
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7. Choice Under Uncertainty
Problem 3: choose between
E: A 25% chance of getting $240 and a 75% chance of losing $760 (0%)
F: A 25% chance of getting $250 and a 75% chance of losing $750. (100%)
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8. Figure 8.1: Utility of a Pair of Events that Increases Total Wealth
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9. Figure 8.2: The Kahneman-Tversky Value Function
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10. Figure 8.3: Rejection of a Dominant Insurance Plan
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11. Sunk Costs
Thought Experiment: you bought a used car for $2,000, but found out it was a lemon, and have no warranty coverage. You will have to continue paying for repairs that cost more than you would be willing to pay for another car to drive.
Do you continue operating and repairing it, or junk it and get another?
Would your response be any different if you had not bought the car, but instead had been given it as a gift?
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12. Judgmental Heuristics And Biases
Three simple heuristics that people use to make judgments and inferences about the environment:
Availability - much easier to recall events that are more “available” in memory.
Representativeness – estimate likelihood that an event belongs in a class by its “representativeness” of the class.
Anchoring and Adjustment - first choose a preliminary estimate and then adjust it in accordance with whatever additional information that appears relevant.
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13. The Psychophysics Of Perception
Weber-Fechner law: the property of perception whereby the just noticeable difference in a stimulus tends to be proportioned to the value of the stimulus.
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14. The Difficulty Of Actually Deciding
For many pairs of alternatives utility functions just don’t seem to assign clear, unambiguous preference rankings.
Difficulty is most pronounced when the alternatives differ along dimensions that are hard to compare.
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15. Figure 8.7: Choosing between Two Apartments
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16. Figure 8.8: Adding an Irrelevant Alternative
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17. The Self-control Pitfall
People often have difficulty carrying out plans they believe to be in their own interests.
Examples of commitment devices:
“Christmas clubs” - special accounts that prohibit withdrawals until late autumn
Whole-life insurance policies .
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