IMCH8new07 - Chapter 8 Cognitive Limitations and Consumer...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 8 Cognitive Limitations and Consumer Behavior Chapter Summary Chapter 8 examines behavior that apparently contradicts the rational choice model. Several examples are given, such as the failure to ignore sunk costs, the fact that people often weigh losses more heavily than gains, or the fact that people behave differently when they lose tickets as opposed to losing the equivalent amount in cash. The chapter begins with a discussion of bounded rationality, a concept familiar to most economists. From here the discussion moves into areas with which economists are less familiar. The chapter discusses at some length the asymmetric value functions developed by Kahneman and Tversky. In this model, modest losses hurt more than gains of equal size. This leads to predictions at variance with models using symmetric value functions. The psychology of dealing with sunk costs is explored as is the notion that money lost hurts more than the same amount of money foregone from a spurred opportunity. Later sections of the chapter deal with judgmental heuristics and biases - that is, how people make decisions given limited time, limited information, and cognitive limitations. Finally, the problem of self control and commitment devices is explored. Chapter Outline Chapter Preview Bounded Rationality The Asymmetric Value Function Sunk Costs Affective Forecasting Errors Out-of-Pocket Costs versus Opportunity Costs Choice under Uncertainty Judgmental Heuristics and Biases The Psychophysics of Perception The Difficulty of Actually Deciding The Self Control Pitfall Summary Teaching Suggestions 1. David Friedman once told a class of mine that love is the most overrated part of marriage. He suggested that people get married because of the gains of comparative advantage, and stay married only as long as those gains are present. One student became incensed at the idea and told me she lost sleep over the cold view of human relationships. Ask students whether Friedman's suggestion is accurate and whether the student was not irrational to lose sleep over a brief comment. What does this story and this chapter suggest about emotions that rational choice does not capture? 2. Have students evaluate their own behavior of the last day or week to get a feel for how many of their decisions are influenced by psychological and emotional input that altered rational choice predictions. It is better to have the students prepare some list ahead of class. Perhaps a list of 10 items other than the ones the book mentions could receive some small amount of credit. Discuss whether the student behavior fits some of the categories in the text and whether there are new categories that are not mentioned in the text. How does the supply and demand model incorporate emotion into its mechanics? 3.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 6

IMCH8new07 - Chapter 8 Cognitive Limitations and Consumer...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online