Lecture 4

Question 1

What is hindsight bias? Why is it an example of heuristics?

Answer 1

• Idea of knowing it all along
• Study performed where they exploited history
• Richard Nixon went to China during the cold war where they were isolated from the west.
• Before Nixon went, they asked students how likely a number of possible outcomes are of his visit
• Students responded with probability estimates
• After Nixon returned to America, they asked the students to remember their previous judgements
• People overestimated their probability judgements for events that happened vs underestimated judgements for things that did not happen
• Example of Anchoring and Adjustment heuristic (100 or 0 = if it happened or not)
• Shows that memory and judgement is a constructive process = coherence matters
• Can be pernicious as you close yourself off to learning - kind of like lying to self

Question 2

What is the Peak-End Rule?

Answer 2

• Judgements of processes that extend over time
  STUDY
• Subjected people to pain perception experiments, one 60s, and then 90s (first 60s were same level as discomfort as first episode, but 30s were marginally less discomforting)
• Ppts rated how painful the experience was
• Ppt rated longer episode as less painful than shorter one, and when asked to repeat one, they chose the longer trial
• Neglected duration and absolute pain, and base judgements on the ‘peak’ experience e.g the end, instead of total pleasure/pain

Question 3

What was the application to colonoscopy patients?

Answer 3

• One of less painful procedures added at the end but otherwise identical
• Ppts who had the extra period of slightly less pain at the end rated it as less painful
• They would come next year
• Implications = to have extra pain at the end but slightly less to increase return rates

Question 4

What is the James Dean effect?

Answer 4

• Ask people to read stories and asked them to rate their life
• Same story of two men: one was a live fast, die young, another was similar, but then at the end of life stopped but still had a pleasant life
• Short life ending on a high is judged as more rewarding than the same life with added mildly positive years at the end

Question 5

What is affective forecasting?

Answer 5

• Making judgements about the future
• Asked people in California and mid-west how happy they thought people were in Cali/Mid-West
• Cali known for beaches and fun, MW known for plain
• Both sets of ppts thought Californians are happier, but they are not. BECAUSE they thought climate and culture had a bigger influence than other factors
• People tend to neglect other situational factors (e.g family/friends) when predicting or remembering emotional states and tend to ignore adaptation

Question 6

What was a study looking at Presidential election?

Answer 6

• Asked ppts how happy they would be if Obama won the presidential election vs how happy they actually were
• Overestimated their happiness/sadness but then normal situational factors returned and life continues as normal
• We underestimate our ability to adjust

Question 7

What is Temporal Discounting?

Answer 7

• Things we value lose their value across time e.g £5 now or £5 in two weeks = people chose £5 now, but £10 in two weeks
• Addicts are steeper discounters - rewards lose value quicker
• Trading off small immediate rewards vs large delayed reward

Question 8

What does hyperbolic discounting lead to?

Answer 8

• Preference reversals: looking at two delayed rewards
• e.g might prefer £120 in 13 months or £100 in 12 months
• Later reward has a higher subjective value
• BUT as the time of the reward approaches, we might prefer £100 now vs £120 in a month

Question 9

What are real life implications for hyperbolic discounting?

Answer 9

Willingness to trade a large delayed reward in the future for a sooner smaller reward has implications in retirement, diet, drugs, sex and env protection

Question 10

What underlies temporal preferences?

Answer 10

• Uncertainty about future
• Illusion of control: e.g money problems - can fix it in a month’s time
• Ability to consume in the future - e.g life is too short, have the cake
• Visceral influences vs self-control - hard to resist emotional/gut appeal
• Projection bias: tendency to project current self into future = leads to both under/overestimating abilities/needs

Question 11

What is the role of anticipation?

Answer 11

• Anticipation of a reward or dread can carry utility
• Study where ppts were asked how much you would be willing to pay to kiss their favourite movie star?
• 3 days was preferred than right now
• Worth more to avoid a nasty shock in 10 years than to avoid that same shock in 3 hours

Question 12

What is The Reference Point Theory?

Answer 12

• Similar to Prospect Theory, intertemporal choice is relative to a neutral reference point
• People are willing to pay more for goods they will receive now vs at a later time
• But the compensation they would require to postpone delivery of goods purchased now until the later time is greater than the Now-later difference
• People are willing to pay a higher premium for accelerated delivery than the later-NOW difference
• Delays are losses, speeding-up is gain
• Losses loom larger than gains: Delay compensation is greater than speed-up cost

Question 13

What a study looking at reference points?

Answer 13

• How much would you pay to get this now? How much would you pay now to have this in a year? Immediate has more money than delayed
• Secondary question said ‘out of stock’ you will be reimbursed you have to wait a year. Ppts chose $126 reimbursement to go from immediate to delayed WHEN initially there was only a $50 difference when they first bought it (first question)
• Reference point changed, departure of time, time is commodity and is worth more
• Opposite was also down where the moved the year up, and people were willing to pay a higher premium than what the initial price was for receiving it immediately (first question)