OPIM
OPIM 290 STUDY GUIDE

# 4 people are sensitive to small stakes diminishing

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4. People are sensitive to small stakes. *diminishing sensitivity to increasing gains and losses integrate losses segregate gains integrate small losses with large gains *Losses hurt more than equal gains feel good Endowment Effect On average, selling prices tend to be about 2x greater than buying prices. Giving up something is roughly 2 times more painful than getting something is pleasurable. Implications of Loss Aversion 1. Disadvantages relative to a reference point are given greater weight than advantages relative to a reference point. 2. Negotiators overvalue what they give more than what they get. 3. Price increases often have a greater effect than price decreases.

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Probability Weighting *we overweight very small probabilities *we underweight larger probabilities *Whenever possible, give people certainty *People are relatively insensitive to shifts in uncertain probabilities Lecture 16 Mental Accounting When we pay more for something, or pay for something at all, we are more inclined to use it, even if it doesn’t benefit us at all, because we want to rectify the sunk cost. “I want to get what I paid for” We allocate money, even specific pieces of money for certain purposes; money has labels. Depreciation of things (gym memberships, shoes that are uncomfortable, etc.) Bracketing Wide vs. narrow bracketing (evaluating portfolios on a yearly vs. monthly basis) Myopic Loss Aversion Because we often consider gambles in isolation, we avoid taking risks that we would take if we adopted a wider frame. Think of risky decisions in the context of all the decisions in your life. Take a portfolio approach! If you would play 100 times, you should play once (if you can afford it). Pre vs. Post-payment It is painful to pay for things after we are done consuming them. It is pleasurable to consume things after we have paid for them (we feel like we are consuming for free!). Takeaways 1. People honor sunk costs, but you shouldn’t. 2. People do not treat all money the same, but you should. 3. People engage in narrow framing (what they see is all there is), but you shouldn’t. 4. People are enticed by promotions that erase hated payments (more than equivalent promotions).
5. People hate paying for something after consumption or working for something after being paid. Lecture 17 The Lessons: Situations can have a powerful effect on behavior. Big effects (administering lethal shocks) can have small causes (geek in a lab coat telling you what to do). Good people can do very bad things. Situations are often easier to change than are people. Lecture 18 The design of choice options (and other operations) affects decisions and behavior. Let’s design choice options to get people to do what we want them to do (without restricting their freedom). Steps for Designing Interventions 1. Identify The Specific Behavior You’d Like To Change. 2. Why Is The Behavior Happening? 3. What Environmental Influences Are Facilitating Or Inhibiting The Behavior? 4. Change Environment In A Way That Increases Desired Behavior.

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