04-30 Lecture Slides (Final)

Surcharge the gas station example the asian disease

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Unformatted text preview: ent #2 (3.0) (0.0) (1.2) (4.0) Total 7.0 6.4 2.1 8.5 Limitations of Utility Theories n༆  To what extent does human decision making follow the predictions from utility theories? ¨༊  Under many situations, utility theories do not fully describe human decision making n༆  Examples of violations of utility theories: ¨༊  Preference reversal ¨༊  Framing effect Preference Reversal Even though the available options are the same, people’s preferences may be reversed List 1 Ride Quality Gas Mileage Asteroid 100 27 Bravo 80 33 Comet 100 21 List 2 Ride Quality Gas Mileage Asteroid 100 27 Bravo 80 33 Clarion 60 33 Utility theories fail to predict such reversals 4 4/30/13 Framing Effect n༆  The way in which alternatives are states (or “framed”) can affect people’s preferences ¨༊  Utility theories should predict no difference in preference n༆  n༆  “Discount” vs. “surcharge” (the gas station example) The “Asian disease” problem (see the textbook, Chapter 11) The Effect of Framing in Gain vs. Loss Scenarios The gain scenario: n༆  A. A 100% chance of winning 81% $50 B. A 25% chance of winning The class survey results nicely show that: ¨༊  19% $200 and a 75% chance of winning nothing People treat risk differently for choices involving gains and those involving losses n༆  The loss scenario: C. A 100% chance of losing 14% $50 D. A 25% chance of losing 86% $200 and a 75% chance o...
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