Thus the offer of a free gift with purchase of your

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Thus, the offer of a “free gift” with purchase of your product can backfire when the gift is unwanted. Preferences are heavily dependent on context - even when context should not rationally matter. Adding Options If people prefer A over B, then people should prefer A over B even in the presence of a third option, C. Compromise Effect Choosing middle option with presence of C (% B goes up) Attraction Effect
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Introducing an obviously worse choice to make another choice more attractive (i.e. Economist subscriptions) Evaluability Some numbers need a context in order for us to know what they mean. When presented in isolation, people will be more inclined to favor a program that saves a higher proportion of the victims than a program that saves a lower proportion but more lives total. Consumers are often in a joint-evaluation mode when they are shopping, but their use of the product will happen in separate-evaluation mode. When comparing items, consumers may put too much weight on attributes that are relatively unimportant in separate evaluation (e.g., smartphone processor speed). Numbers/attributes that are easier to evaluate will often receive greater weight in a separate- evaluation mode than in a joint-evaluation mode. Lecture 14 Expected Utility Theory The “carriers of utility” are states of health, not gains and losses. Prospect Theory Prospect theory describes how people actually value prospects. Gains and losses relative to a reference point. People are sensitive to gains and losses, rather than to final states. People are risk-seeking in the domain of losses, but risk-averse in the domain of gains. *with gains, we value certainty *with loss, we are risk seeking Some Salient Reference Points 1. Expectations/What is Typical 2. Status Quo 3. What Could Have Been Transaction Utility People are sensitive to the value of the deal . We buy some things (that we don’t really want) primarily because they are a good deal. We fail to buy other things (that we do really want) because they are a bad deal.
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Status Quo Because the status quo often serves as the reference point, people are sensitive to deviations from the status quo. Cutting salaries = a loss Failing to increase salaries = no loss What Could Have Been Happiness of bronze medal winner vs. silver medal winner Takeaways: Reference Points 1. Actively SHIFT your own reference points 2. Adopt the most appropriate reference point (often, total wealth) 3. Know what others’ reference points will be. Lecture 15 Spending Because people are sensitive to gains and losses, then they are more motivated to spend gains than recovered losses. Spending of “bonus” > “rebate” Gains and Losses 1. People are risk-seeking in the domain of losses & risk-averse in the domain of gains. 2. People are sensitive to even arbitrary reference points. 3. People spend gains faster than recovered losses.
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