Final Exam

Question 1

Describe Classical Economics

Answer 1

Many of the forefathers of economics (i.e. Adam Smith) acknowledged the important role that psychological principles play in human behavior.

It departed from psychology because they wanted a more exact science and also because psychology was just in its early stages (late 19th Century)

Question 2

What happened during the era of Neoclassical Economics

Answer 2

There was a departure from the young science of psychology in the turn of the 20th century

Question 3

Describe Neo-Classical Economics

Answer 3

• Took place in the turn of the 20th Century, departure from the young science of psychology. Descriptive mathematical models replaced psychology in economic theories.

Question 4

Describe 4 components describing people from a standard economics

Answer 4

People are…

1. Perfectly ration
2. Selfish (what we gain out of each situation)
3. Utility maximizes
4. Have limited cognitive capacity

Question 5

Define Heuristics

Answer 5

Simple Rules of Thumb
Heuristics are influenced by irrelevant info
Decisions are biased (50% of managerial decisions fail, Errors do not equal biases)

Question 6

Relying on heuristics and biases lead us to…

Answer 6

To make mistakes, because heuristics can be influenced by irrelevant info i.e. decisions are biased. (Biases also cannot be unseen and are likely to be repeated)

Question 7

Describe the Heuristics and Biases Approach (Amos Tversky, Daniel Kahneman)

Answer 7

It states our world is too complex (too much info, not enough processing powers), people employe heuristics to evaluate info. These rules help us make sense of our complex environment, fast and effortlessly which can lead to why we employ stereotypes.

Question 8

How is Behavioral Economics different than Standard Economics?

Answer 8

While its similar, behavioral economics is w/ out the assumption that people are rational.
When making a policy, Ariely says we should consider human behavior.
It’s descriptive, not prescriptive. Descriptive models remove the assumption of rationality, is experimental, and tries determine what factors determine human behavior.

Question 9

Describe the: (Classical Economics) Expected Utility Theory (EUT) and its 4 axioms

Answer 9

• In decisions under risk (uncertain outcomes), each alternative has a subjective utility. (Subjective evaluation of the alternatives)
• Normative Model of Rational Choice
• Descriptive Model of Economic Behavior
• Assumption: Rational people would want to obey the axioms of the model, and most people actually do (most of the time)
• 4 Axioms:
  1. Completeness (people have well-defined preferences and can always decide btwn any two alternatives)
  2. Transitivity: Preferences are consistent
  3. Continuity: Adding a third option could (give a certain p) undermine its appeal
  4. Independence: Two options mixed w/ a 3rd, one maintain the initial preferences

Question 10

Describe Prospect Theory (Kahneman and Tversky)

Answer 10

• Holds that prospects (outcomes) are considered in terms of gains and losses, relative to a reference point (the current states). We don’t evaluate outcomes objectively, rather according to our current state.
• it’s an alternative to EUT (which is logical based)
• Prospect theory came to present an empirical approach to devision making, focuses on value over utility. Deals w/ decision weight rather than probability.

Question 11

What are the two phases of the Prospect Theory?

Answer 11

Editing & Evaluation

Question 12

Describe the Editing + Evaluation Phases of the Prospect Theory

Answer 12

We make a preliminary analysis of the possible prospects to simplify things to help us make a decision
A. Coding (perceiving the prospects by combining probabilities associated with identical outcomes)
B. Combination: Simplifying the prospect by combining probabilities associated w/ identical outcomes
C. Segregation - separating risky vs. safe
D. Simplification - rounding outcomes and probabilities
E. Dominance - searching for dominant alternatives

Evaluation Phases selecting the prospect w/ the (subjective) highest value

Question 13

Name the 6 behavioral regularities.

Answer 13

1. Certainty Effect
2. Reflection Effect
3. Isolation Effect
4. Framing Effect
5. Overweight Effect
6. Loss Aversion

Question 14

Describe the Reflection Effect

Answer 14

Tendency for a mirror image preference btwn positive and negative prospects.
The reflection of prospects around 0 reverses the preferences.

Example problem:
Alternative A: $3000 for sure (80% of people selected this), vs. Alternative B: $4000 for 80%, otherwise.

Mirror image of that situation:
Alternative C: -$3,000 for sure vs. Alternative D -$4,000, 80% ($0 otherwise - 92% of couples chose this).

Question 15

Describe the Endowment Effect (Richard Thaler)

Answer 15

• Ownership increases utility
• People value goods more once we own them
• Selling a mug for twice its worth because people value the item and the loss

Question 16

What are the three basic Heuristics?

Answer 16

1. Representativeness
2. Availability
3. Anchoring & Adjustment

Question 17

Describe Representativeness (Heuristics)

Answer 17

A. Used when making judgements about probability of events
B. Work under the rule the more of an object X is similar to class Y, the more likely is it that the object belongs to the class
C. The problem - similarity doesn’t always predict probability (i.e. toss a coin 6 times and get heads 5 times)
These all lead us to systematic mistakes.

Question 18

Describe availability (heuristics)

Answer 18

A. Used when making judgements about frequency of events
B. When things are more frequent, we think about them more.
I.e. plane crash, people become scared so they end up driving more, bringing down plane fares and spiking gas prices.פ

Question 19

Describe Anchoring + Adjustments (Heuristics)

Answer 19

This iPad should cost $999, but it’s going to be selling it for $499 instead - Initial value anchor and adjusts
- used when making estimations
Problem: initial value are not always relevant, adjustments are not sufficient.

Question 20

What are three biases in organizations?

Answer 20

1. Overconfidence
2. Affect Heuristic
3. Inattentional Blindness

Question 21

Describe overconfidence and the three types.

Answer 21

Unrealistic evaluation of one’s own abilities.

1. Overestimation of odds and chances
2. Better than avg. - we are better than we actually are
3. Over-evaluation of knowledge/abilities

Question 22

Describe Affect Heuristics

Answer 22

1. Feelings & emotions effect our decisions (Positive + negative responses)
   B. Automatic
   C. Not always conscious
   D. Example: Would you choose to endorse, an airport safety protocol that is expected to save 150 lives, or a protocol that will save a high percentage of a population of 150 people under risk? || the higher the percentage the more likely people will want to support that because the % evaluation gives a reference point to comparison, which in turn makes us feel better

Question 23

Describe Inattentional Blindness

Answer 23

A. Inability to see things that are just in front of us
B. Problem of attention, not perception
C. Not related to abilities (memory, cognition, expertise)
D. Radiologists only seeing what they are looking for, now what else is in the X-ray.
E. Why can’t we see things? Answer: Expectations, we see what we expect to see, the availability heuristic, cognitive load

Question 24

Describe some example of Financial Motivation

Answer 24

Money, Status, Promotion

Question 25

What are some examples of motivators the social market?

Answer 25

Reciprocity, pleasure, togetherness

Question 26

Give an example of a social vs. economic markets

Answer 26

One is more likely to help a friend if they ask for freely, because that’s a social matter, but if they offer you a small amount of money, you are less likely because it switches to market norms.

Question 27

Describe the Faming Effect

Answer 27

Overweighting small probabilities - tendency to subjectively over-evaluate small probabilities. The lower the probability is, the higher we will weigh it subjectively.

Question 28

Describe Sunk-Cost

Answer 28

- Investing in failed projects - Example: a lottery after completing the job vs. a lottery before completing his job. (more people are willing to take the chance at the beginning of the day, we have a tendency to consider in our previous decisions for the present/future) Sunk cost in real life? - Approving a new loan for a client who can’t make payments.

Question 29

How do you improve a sunk-cost situation

Answer 29

De-Biasing: - Taking the decision out of the hands of the initial decision maker (i.e. replacing a CEO after a failed venture) - Acknowledging the fact that people can make its mistakes - Encouraging failures - Highlighting the absurdity

Question 30

What are the 3 types of effect on our decision quality?

Answer 30

Prior Action have no influences (optimism bias): optimistic expectations about the future Prior Actions have an effect, when they shouldn’t (self-signaling): past behaviors signal to us who we are and what we care about, thus past behaviors guide our present and future behavior. Non- Actions : inaction inertia (ripple effect of non-action) which describe actions we did not take, influence our decisions In the future.

Question 31

Describe Cognitive Dissonance

Answer 31

When beliefs/values and actions contradict, there is a psychological tension to reduce tension, we must change either values or behavior.

Question 32

Name the phases of the rational model

Answer 32

``` Defining a problem Setting choice criteria and weights Defining alternatives Evaluating alternatives (based on criteria) Making a decision ```

Question 33

Describe Bounded Rationality (Herbert Simon) - 1955

Answer 33

Humans are limited in their cognitive abilities (memory, perception, processing) Under these limitations, people are rational: - simplified thinking rules - satisficing

Question 34

Name the phases of the bounded rationality model and what’s the different w/ the rational model

Answer 34

1. Defining a problem 2. Setting a criteria 3. Defining ONE alternative 4. Evaluating alternative 5. Making a decision It’s limiting the possibilities of which to choose from in order to make the best possible decision.

Question 35

Describe the Certainty Effect

Answer 35

A tendency to overweight outcomes that are considered certain relative to probable outcomes

Question 36

Name some criticisms of Prospect Theory

Answer 36

- May lead to some absurd predictions i.e (A: $100 for sure =B: $100, 50% otherwise $101 - prospect theory would suggest A when we know it should be B) - Does not represent real life problems (IRL, people are rational) - Too specific and narrow (1-800)

Question 37

Define Loss Aversion

Answer 37

Losses loom larger than gains, the psychological impact of losses is twice as much as gains. - people prefer to avoid loss

Question 38

Name Two Empirical Supports for Loss Aversion

Answer 38

- Endowment Effect | - Status Quo Bias

Question 39

According to the Dan Ariely social experiment, what did we learn in terms of financial motivations vs. social ones?

Answer 39

In his experiment, the group that was asked to help as a “social” favor often showed more effort than people who were asked to do something in exchange for 5 cents or for 5 dollars. Summary: One is more likely to help a friend if they ask for free - because it’s a social matter.

Question 40

When money is introduced people switch from a social market to a ______ market.

Answer 40

Answer: economic

Question 41

The more efficient something is in the economic market, the ___ efficient it is in the social market.

Answer 41

Answer: less

Question 42

What are some characteristics regarding people who are primed to an economic market?

Answer 42

- They ask for help less - Offer less help - Makes them more competitive

Question 43

True or False: Economic norms violate social norms and hurt social interactions (even if money is socially accepted)

Answer 43

True

Question 44

Regarding work perks, i.e. Credit Card Points, vacation days etc. what was considered more or less fair?

Answer 44

When it comes to the distribution of money or points, it is considered less fair but time and small gifts is perceived as fair.

Question 45

Which is easier moving from social to economic or vice versa?

Answer 45

Moving from social to economic. | The other way is much harder.

Question 46

Define Fungible resources

Answer 46

Resources that can be replaced by another identical item, mutually interchangeable i.e. money.

Question 47

Describe Attribute Framing

Answer 47

- Only works when one doesn’t already have experience w/ these products, when there’s a basis the frames don’t really have much an effect - Gain Frame: People are more risk averse - Loss Frame: people are greater risk takers

Question 48

True or false: According to risk tendency we are more motivated to avoid losses than to obtain gains because they have a bigger impact the classic framing effect (Tversky & Kahneman)

Answer 48

True

Question 49

Describe the difference between status quo and default biases

Answer 49

Status quo: usually involves mundane decisions a preference for the existing choice Decisions are made by others or in the past Defaults: Involves complex decisions A preference not to make a decision Decisions are pre-determined by policy makers

Question 50

What does the description - experience gap refer to?

Answer 50

Gap refers to the difference between description and experience-based decisions. Experience Based: Risk seeking for gains, risk aversion for losses// Underweighting small probabilities, overweighting large probabilities. Description Based: Risk aversion for gains, risk seeking for losses. Overweighting small probabilities and underweighting large probabilities.

Question 51

Why does the description-experience gap exist?

Answer 51

- Small samples (insensitivity to sample size, using too few instances, overconfidence) - Biased evaluation - Conditional sampling - Recency effect (overweighting recent events)

Question 52

What is numerical display used to highlight, the background or the foreground?

Answer 52

Background (i.e. the amount of people under risk aka risk tolerance) - Best used for focusing on specific data points

Question 53

What does the graphical display best highlight the background or the foreground and what is it best used for?

Answer 53

The foreground (i.e. the amount of people to get hurt aka risk avoidance) - It’s better used for the summary of data - people will remember more later, because they remember better through graphical rather than through numerical representation - shows development trends - compare between variables - prospects and predictions - big datasets - highlights risks

Question 54

Describe Outcome Bias

Answer 54

Biased evaluation of the decision process Focuses on outcome Neglects relevant factors Decisions resulting in negative outcomes are evaluated as wrong Decisions with positive outcomes are considered as better excisions. Decision makes who made decisions resulting in positive outcomes are perceived as more competent. Decisions against alternatives resulting in negative outcomes are still considered good decisions. (The “what if” and “glad we didn’t make that choice”

Question 55

Describe Impact Bias

Answer 55

Many decisions we make are based on affective forecasts (how we think we will feel about them in the future) which leads us to overestimate the intensity and duration of our emotional reactions. Especially true for negative events, we tend to underestimate our ability to cope w/ something, but people adjust to things pretty well and rapidly.

Question 56

Describe the process of mental accounting

Answer 56

People divide their assets into separate non-transferable accounts and this division affects how people feel about that money and the utility of that money and consequently the way people label resources effects how they will use them.

Question 57

Are you more likely to see a show if you lost a ticket ($100 value) or if you lost a $100 bill?

Answer 57

Answer: lost the $100 bill because they perceived the cost of the lost ticket to be twice the amount that it was originally worth.

Question 58

What are some consequences of Mental Accounting?

Answer 58

- Hedonic (i.e. pleasurable framing) - segregate gains - integrate losses - combining a small loss w/ a large gains - separating a small gain from a big loss

Question 59

Describe the process of mental budgeting

Answer 59

We set budgets before consumption opportunities arise: Overestimation and underestimation These burgers aren’t transferrable between our accounts, no adding and no re-allocating.

Question 60

Define Acquisition Utility

Answer 60

The value consumers derive from obtaining a good (minus the price to be paid)

Question 61

Define Transaction Utility

Answer 61

The value consumers get from the deal itself, depending on the comparison of actual price w/ a reference price.

Question 62

Finding $100 in your pocket and spending it on hedonic products, because it feels like “free money” is an example of...

Answer 62

Emotional accounting

Question 63

The source of money affect how much and what the money is spent on is an example of what “effect”?

Answer 63

The laundry effect. Based on the source of the money dictates how much we will spend and what we will spend it on. I.e. survey participation money from a cigarette company

Question 64

The pain of paying depends on :

Answer 64

- Saliency of Paying (when you can see what you’re paying for) - Temporal Distance (distance between paying and actual consumption)

Question 65

What is the origin behind why we feel pain when we spend money?

Answer 65

``` The “moral” tax of feeling guilt and regrets Opportunity cost (people tend to increase their personal benefit, and when in conflict most us tend to exploit others and be dishonest) ```

Question 66

If your goal is to control spending, name some things you can do to help?

Answer 66

Use moe salient payment methods (i.e. cash and specifically not credit cards or tokens)

Question 67

If your goal is to increase enjoyment (on a vacation, on a meal etc) how would you pay?

Answer 67

Pay in advance (all you can eat meals, pre-paid to avoid the pain of paying)

Question 68

Define Motivation

Answer 68

Willingness to exert effort and other personal resources: - at high level of intensity - towards a certain direction - with persistence

Question 69

Define Productivity

Answer 69

Employee’s effectiveness. The amount of goods a worker produces in a given amount of time

Question 70

What are two types of incentives organizations can use?

Answer 70

``` Intrinsic incentives (increases the internal motivation to perform an action for the enjoyment and satisfaction inherent in the action itself) Extrinsic incentives (increases the external motivation to perform an action in order to obtain a positive outcome or avoid a negative outcome) ```

Question 71

What is considered a problem with extrinsic motivation?

Answer 71

External incentives increase extrinsic motivations, but may decrease intrinsic motivation.

Question 72

Define Self Determination Theory

Answer 72

External incentives are perceived as manipulative and controlling thus people start working just for the money

Question 73

How does one link performance and payment?

Answer 73

1. Step I - Set a Goal: What is the desired outcome (what is the threshold for getting a reward)? 2. Step II - An accurate measure of performance 3. Step III - Incentivize employees who reach the threshold

Question 74

What effects intrinsic motivation

Answer 74

Autonomy | Degree of challenge

Question 75

Describe sorting effect

Answer 75

It’s a natural selection process where good performers are attracted to places which pay based on performance so ultimately they get paid well and stay longer at their job

Question 76

Describe some main findings of the goal-setting theory

Answer 76

Specific goals are better than general goals | Challenging goals are more motivating than easy goals - a linear connection between goal difficulty and performances

Question 77

Describe some rules of thumb for goal setting

Answer 77

- goals shouldn’t be too narrow - employee commitment is essential - timely - specific - challenging but realistic - frame goals as gains, not as losses

Question 78

True or False. Bonus plan programs in general and performance-based incentives in specific work but have a limited effect.

Answer 78

True.

Question 79

Define Pro-social motivation

Answer 79

The desire to benefit other people or society as a whole with no personal cost

Question 80

Why is pro-social behavior important? (Specifically in the context of organizations)

Answer 80

- Orgs and employees are not selfish and self-centered organisms who care only about personal profit. Social forces play a major rule in org behavior. - a necessary step in creating meaning and work satisfaction - facilitate positive org outcomes (creativity, perseverance) - > doesn’t have to be altruistic in order to have pro-social motivations - > contradicts classic economics

Question 81

Motivations in general operate on which three hierarchical levels?

Answer 81

- Global (pro-social) motivation: relatively stable dispositional orientations towards particular goals/actions across time and situations - Contextual Motivation: Towards a specific domain or class of behavior. - Situational Motivation: Towards a particular behavior in a specific moment in time

Question 82

Name 4 goals in pro social motivations

Answer 82

1. Altruistic Goals (protect or promote the well-being of others without the intention of personal benefit) 2. Egoistic Goals (Increase positive effect, reduce negative effect, boost self-esteem, provide external reward) 3. Principalistic Goals: Advance moral values or ethical causes 4. Collectivist Goals: Defend or strengthen one’s bond with a group

Question 83

What’s the main purpose for pro social motivation?

Answer 83

Giving to others makes us happy

Question 84

Name some steps to promote pro-social motivations

Answer 84

1. Job Design (through structural characteristics of the work that effect employee’s relationships w/ others increase pro-social motivation) - Task Significance (extent to which a job provides opportunities to have impact on others - Contact with beneficiaries (enables employees to identify and empathize w/ beneficiaries and strengthens effective commitment) 2. Collectivist Norms and Rewards (collectivism emphasizes the importance of contributing to the group rather than personal goals, when norms encourage “other interest”, pro-social motivation increases since the org signals to its employees it’s legit and acceptable s 3. Transformation Leadership motivates by linking their work to their core values

Question 85

Are pro-social behavior and intrinsic motivation basically the same thing?

Answer 85

The jury is still out.

Question 86

Name some underlying mechanisms (that promote lying)

Answer 86

1. Self Maintenance Theory : A tension arises from the inconsistency btwn the desire to maintain a positive self-image and the desire to increase personal gain. 2. Justifications: we justify immoral actions 3. Moral Licensing: cognitive bias, which enables individuals to behave immorally without threatening their self-image of being a moral person. 4. White lies: Altruistic, Pareto, Selfish, Spiteful, Gray lie

Question 87

True or False. Employees are less tolerant toward abusive supervisors who demonstrated prior ethics behavior.

Answer 87

False. Employees were more tolerant, more forgiving and less emotional

Question 88

Describe some characteristics of group decision making scenarios

Answer 88

- members participation is unequal - more dominant members tilt the scales - status predicts dominance (regardless of skill level) - managers speak more - men speak more - the person at the head of the table speaks the most - people are more polite and considerate and avoid controversy