I will just continue from my last blog were i started to write about endowment effect .
My group, we read a paper called Aspects of endowment: A Query theory of value construction.
I found this paper very interesting because authors showed in 3 experiments how they can create or eliminate endowment effect by simply reversing the order of two questions about the possible exchange. I will briefly describe those experiments later, let me first mention the theory they proposed as an explanation of endowment effect.
The theory is called A Query theory of the endowment effect. It says that process which account for endowment effect is based on the idea that valuations depend on memory retrieval processes.
A Query Theory four premises ( that explain endowment effect) are: First, decision maker decompose valuation questions ( e.g. What would be my selling price?). Second, is that these queries are executed serially, one after the other. Third, because of output interference , query order matters ( first query is more represented than the second) and Fourth premise suggests different response modes produce different query order ( Choosers first consider why they might not enter the transaction and after why they might do it, sellers do it in reverse order).
In experiments participants were randomly assigned to be either sellers ( endowed) they were given a mug that was theirs to keep and they could later sell it to experimenter for some amount of money and choosers ( not endowed) they could later choose between receiving the mug or some amount of money.
In First experiment they wanted to know if endowment can change the considered aspects.
Before indicating valuation of the mug participants we asked to list the aspects (reasons) why would they personally want the mug or have the money. As suggested by query account sellers produced more value-increasing aspects ( positive thoughts about the mug and negative thoughts about the money) and choosers produced more value-decreasing aspects ( positive thoughts about the money and negative thoughts about the mug).
In Second experiment they wanted to see if they can eliminate endowment effect.
They used two aspect-listings conditions. First, all aspects participants considered in making decisions. Second, it was reversed. Sellers were asked to first produce value-decreasing and after value-increasing aspects and choosers were first asked to produce value-increasing and after value-decreasing aspects. Second scenario showed that by simply altering the order in which participants reported the aspects they were considering was successful in completely eliminating the endowment effect.
In third experiment they wanted to see if they could create endowment effect.
Participants were informed that they were going to choose between any amount of money and the mug and nobody was endowed with the mug, after they completed two aspect-listing tasks the order of which was manipulated. Even though, participants were not endowed with the mug and answered same set of aspects questions, by manipulating the order of sets of aspects resulted in endowment effect.
In those three experiments the authors demonstrated that : 1) endowment influences the aspects that individuals consider 2) endowment changes the order in which aspects are recalled 3) these aspects are related to decision maker`s valuation of objects 4) by changing the order of aspect queries we can eliminate the endowment effect as well as we can produce endowment effect in absence of ownership.
Tuesday, 17 November 2009
Tuesday, 10 November 2009
Decision framing
Last week my group read and presented in the class paper called Choices, Values and Frames written by D. Kahneman and A. Tversky.
First part of the paper focuses on an approach to risky choice especially on hypothesis based on prospect theory. Because we already talked about prospect theory in previous lectures I am going to focus on a second part of the paper were authors discuss framing effect and framing of outcomes.
Risky prospects are characterized by their possible outcomes and by the probabilities of these outcomes. The same option can be framed or described in different ways. Look at following example :
•Problem1
•Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed.
•If Program A is adopted, 200 people will be saved. (72%)
•If Program B is adopted, there is one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved (28%)
•Problem 2
•If Program C is adopted, 400 people will die (22%)
•If Program D is adopted, there is a one-third probability that nobody will die and two-thirds probability that 600 people will die (78%)
In the first problem as expected preferences are risk averse ( people prefer saving 200 lives for sure then gamble). In the second problem people showed risk seeking preference for gamble. As we can see those two problems are the same.
One of the processes that control the framing of outcomes and events is framing effect. This public health problem above illustrates a framing effect in which change of wording from "lives saved" to "lives lost" induced a shift of preference from risk aversion to risk seeking. Framing effect can occur without anyone being aware of the impact of the frame on the decision. It can be exploited deliberately to manipulate the attractiveness of options.
After, authors moved on to analyse mental accounting that specifies the advantages and the disadvantages associated with the multiattribute option.
They suggested, that people will spontaneously frame decisions in terms of topical accounts. A topical account relates the conseqences of possible choices to a reference level that is determined by the context within which the decision arises. The following problem illustrates example of mental accounting in which the posting of a cost to an account is controlled by topical organization:
•Imagine that you have decided to see a play and paid the admission price of $10 per ticket. As you enter the theatre you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered.
•Would you pay for another ticket?
•Yes (46%) No (54%)
•Imagine that you have decided to see a play where admission is 10$. As you enter the theatre you discover that you have lost a $10 bill
•Would you still pay $10 for a ticket for the play?
•Yes (88%) No (12%)
Why are people unwilling to spend $10 after having lost a ticket if they would spend that sum after loosing $10 cash? According to topical org anization, going to the theatre is normally viewed as a transaction in which the cost of the ticket is exchanged for the experience of seeing the play. Buying a second ticket increases the cost of seeing the play to a level that is unacceptable for many people. In contrast the loss of cash is not posted to the account of the play and it doesn`t affect the purchase of the ticket.
Losses and costs are described at the end of the article.Many decision problems take the form of a choice between status quo and accepting an alternative ( which is advantageous or in some aspects disadvantageous). Advantages of alternative options will be evaluated as gains and disadvantages as losses. Thaler used the term endowment effect to describe the reluctance of people to part from assets that belong to their endowment. It is more painful to give up an asset than it is pleasurable to obtain it, buying prices will be significantly lower than selling prices.
I will finish here because my group is going to read a paper about endowment effect for friday`s lecture. I will write some more about it next week.
First part of the paper focuses on an approach to risky choice especially on hypothesis based on prospect theory. Because we already talked about prospect theory in previous lectures I am going to focus on a second part of the paper were authors discuss framing effect and framing of outcomes.
Risky prospects are characterized by their possible outcomes and by the probabilities of these outcomes. The same option can be framed or described in different ways. Look at following example :
•Problem1
•Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed.
•If Program A is adopted, 200 people will be saved. (72%)
•If Program B is adopted, there is one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved (28%)
•Problem 2
•If Program C is adopted, 400 people will die (22%)
•If Program D is adopted, there is a one-third probability that nobody will die and two-thirds probability that 600 people will die (78%)
In the first problem as expected preferences are risk averse ( people prefer saving 200 lives for sure then gamble). In the second problem people showed risk seeking preference for gamble. As we can see those two problems are the same.
One of the processes that control the framing of outcomes and events is framing effect. This public health problem above illustrates a framing effect in which change of wording from "lives saved" to "lives lost" induced a shift of preference from risk aversion to risk seeking. Framing effect can occur without anyone being aware of the impact of the frame on the decision. It can be exploited deliberately to manipulate the attractiveness of options.
After, authors moved on to analyse mental accounting that specifies the advantages and the disadvantages associated with the multiattribute option.
They suggested, that people will spontaneously frame decisions in terms of topical accounts. A topical account relates the conseqences of possible choices to a reference level that is determined by the context within which the decision arises. The following problem illustrates example of mental accounting in which the posting of a cost to an account is controlled by topical organization:
•Imagine that you have decided to see a play and paid the admission price of $10 per ticket. As you enter the theatre you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered.
•Would you pay for another ticket?
•Yes (46%) No (54%)
•Imagine that you have decided to see a play where admission is 10$. As you enter the theatre you discover that you have lost a $10 bill
•Would you still pay $10 for a ticket for the play?
•Yes (88%) No (12%)
Why are people unwilling to spend $10 after having lost a ticket if they would spend that sum after loosing $10 cash? According to topical org anization, going to the theatre is normally viewed as a transaction in which the cost of the ticket is exchanged for the experience of seeing the play. Buying a second ticket increases the cost of seeing the play to a level that is unacceptable for many people. In contrast the loss of cash is not posted to the account of the play and it doesn`t affect the purchase of the ticket.
Losses and costs are described at the end of the article.Many decision problems take the form of a choice between status quo and accepting an alternative ( which is advantageous or in some aspects disadvantageous). Advantages of alternative options will be evaluated as gains and disadvantages as losses. Thaler used the term endowment effect to describe the reluctance of people to part from assets that belong to their endowment. It is more painful to give up an asset than it is pleasurable to obtain it, buying prices will be significantly lower than selling prices.
I will finish here because my group is going to read a paper about endowment effect for friday`s lecture. I will write some more about it next week.
Thursday, 5 November 2009
Measuring Utility
The first graph is for Certainty equivalence, and the second one is for Probability equivalence.Horizontal axes represents monetary values and the vertical values represents utility values.
The task for this exercise was to state the amount of money that would make me indifferent between that amount and gamble.
As you can see those two graphs are similar because i am not a much of a gambler. In the first graph i would settle for half of the amount rather than risking to loose whole amount offered.
And in a second graph i would go for a certain amount and only if the probability of me winning more money is high (95%) then it would make me to gamble .
Horizontal axes represents monetary values and the vertical ones utility values. The task was to state the amount of money that would make us indifferent between that amount and a gamble.
Wednesday, 4 November 2009
Decision making under risk and uncertainty
After last week`s lecture i can understand better the theories of decison making under risk which includes expected value theory, expected utility theory and prospect theory. And also decison making under uncertainty which includes support theory and cumulative prospect theory.
We had to read an article called Priority Heuristic : Making choices without trade-offs written by E. Brandstatter, G. Gigerenzer and R. Hertwig.
At first, i found the article hard to comprehend, but after a good explanation of relevant theories at the lecture i found it less confusing.
In the article the authors identify a number of properties that the priority heuristic should have as a process model and illustrate how they may be tested. The heuristic consists of the following steps: Priority Rule : go through reasons in the order: minimum gain, probability of minimum gain, maximum gain. Stopping Rule: stop examination if the minimum gains differ by 1/10 (or more) of the maximum gain; otherwise, stop examination if probabilities differ by 1/10 (or more) of the probability scale. Decision Rule: choose the gamble with the more attractive gain (probability). The heuristic combines features from three different sources: Its initial focus is on outcomes rather than on probabilities.
The results, along with research, suggest that although the priority heuristic captures some variability in the attention paid to outcomes, it fails to account for major characteristics of the data, particularly the frequent transitions between outcomes and their probabilities.
We had to read an article called Priority Heuristic : Making choices without trade-offs written by E. Brandstatter, G. Gigerenzer and R. Hertwig.
At first, i found the article hard to comprehend, but after a good explanation of relevant theories at the lecture i found it less confusing.
In the article the authors identify a number of properties that the priority heuristic should have as a process model and illustrate how they may be tested. The heuristic consists of the following steps: Priority Rule : go through reasons in the order: minimum gain, probability of minimum gain, maximum gain. Stopping Rule: stop examination if the minimum gains differ by 1/10 (or more) of the maximum gain; otherwise, stop examination if probabilities differ by 1/10 (or more) of the probability scale. Decision Rule: choose the gamble with the more attractive gain (probability). The heuristic combines features from three different sources: Its initial focus is on outcomes rather than on probabilities.
The results, along with research, suggest that although the priority heuristic captures some variability in the attention paid to outcomes, it fails to account for major characteristics of the data, particularly the frequent transitions between outcomes and their probabilities.
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