Rationality Myth How & Why People Make Weird Choices C:\Documents and Settings\katarina\Dokumenty\Stažené soubory\logo_black.jpg ¨„Man is a rational animal – so at least I have been told. Throughout a long life I have been looking diligently for evidence in favour of this statement, but so far I have not had the good fortune to come across it.“ ¨B. Russell ¨What does “RATIONAL” mean? ¨Reasonable & logical ¨Unbiased by emotions ¨Optimal, relative to the information available ¨ ¨Expected Utility Theory: ¨ Expectancy × Value ¨ C:\Users\Taaanique\Desktop\Decisions-300x225.jpg C:\Users\Taaanique\Desktop\Tea set2.png C:\Users\Taaanique\Desktop\Tea set6.png C:\Users\Taaanique\Desktop\Tea set2.png C:\Users\Taaanique\Desktop\Tea set6.png C:\Users\Taaanique\Desktop\broken cup.jpg ¨Set A: Set B: Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. ¨Set A: ¨24 pieces ¨ Set B: 31 pieces ¨ Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. ¨Set A: ¨24 pieces ¨ ¨Dinner plates 8, all in good condition Set B: 31 pieces ¨ ¨Dinner plates 8, all in good condition Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. ¨Set A: ¨24 pieces ¨ ¨Dinner plates 8, all in good condition ¨Soup/salad bowls 8, all in good condition Set B: 31 pieces ¨ ¨Dinner plates 8, all in good condition ¨Soup/salad bowls 8, all in good condition Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. ¨Set A: ¨24 pieces ¨ ¨Dinner plates 8, all in good condition ¨Soup/salad bowls 8, all in good condition ¨Dessert plates 8, all in good condition Set B: 31 pieces ¨ ¨Dinner plates 8, all in good condition ¨Soup/salad bowls 8, all in good condition ¨Dessert plates 8, all in good condition Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. ¨Set A: ¨24 pieces ¨ ¨Dinner plates 8, all in good condition ¨Soup/salad bowls 8, all in good condition ¨Dessert plates 8, all in good condition Set B: 31 pieces ¨ ¨Dinner plates 8, all in good condition ¨Soup/salad bowls 8, all in good condition ¨Dessert plates 8, all in good condition ¨Cups 8, 2 of them broken ¨Saucers 8, 7 of them broken ¨ Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. ¨Three groups: Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. Offered price Set A(24pcs) Offered price Set B (31pcs) Group 1 – simultaneous evaluation Group 2 – Set A only - Group B – Set B only - ¨Three groups: Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. Offered price Set A(24pcs) Offered price Set B (31pcs) Group 1 – simultaneous evaluation $ 30 $ 32 Group 2 – Set A only - Group B – Set B only - ¨Three groups: Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. Offered price Set A(24pcs) Offered price Set B (31pcs) Group 1 – simultaneous evaluation $ 30 $ 32 Group 2 – Set A only $ 33 - Group B – Set B only - ¨Three groups: Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. Offered price Set A(24pcs) Offered price Set B (31pcs) Group 1 – simultaneous evaluation $ 30 $ 32 Group 2 – Set A only $ 33 - Group B – Set B only - $ 23 ¨Dictionary A: ¨ Dictionary B: ¨ Hsee, C. K. (1996). The evaluability hypothesis: An explanation for preference reversals between joint and separate evaluations of alternatives. Organizational behavior and human decision processes, 67(3), 247-257. ¨Dictionary A: ¨ ¨Published 1993 Dictionary B: ¨ ¨Published 1993 Hsee, C. K. (1996). The evaluability hypothesis: An explanation for preference reversals between joint and separate evaluations of alternatives. Organizational behavior and human decision processes, 67(3), 247-257. ¨Dictionary A: ¨ ¨Published 1993 ¨10,000 entries Dictionary B: ¨ ¨Published 1993 ¨20,000 entries Hsee, C. K. (1996). The evaluability hypothesis: An explanation for preference reversals between joint and separate evaluations of alternatives. Organizational behavior and human decision processes, 67(3), 247-257. ¨Dictionary A: ¨ ¨Published 1993 ¨10,000 entries ¨Like new Dictionary B: ¨ ¨Published 1993 ¨20,000 entries ¨Cover torn, otherwise like new Hsee, C. K. (1996). The evaluability hypothesis: An explanation for preference reversals between joint and separate evaluations of alternatives. Organizational behavior and human decision processes, 67(3), 247-257. ¨Three groups: Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. Offered price Dictionary A Offered price Dictionary B Group 1 – simultaneous evaluation $ 19 $ 27 Group 2 – Dictionary A only $ 24 - Group B – Dictionary B only - $ 20 ¨Preference reversal ¨In certain conditions, our preferences and/or evaluations may change even though the attributes of the objects remain the same. ¨ ¨Preference reversal ¨In certain conditions, our preferences and/or evaluations may change even though the attributes of the objects remain the same. ¨ ¨Rational prioritization (transitive): ¨A is more than B is more than C ¨ ¨Irrational prioritization (intransitive): ¨A is more than B is more than C is more than A ¨ ¨Preference reversal ¨In certain conditions, our preferences and/or evaluations may change even though the attributes of the objects remain the same. ¨ ¨Rational prioritization (transitive): ¨A is more than B is more than C ¨ ¨Irrational prioritization (intransitive): ¨A is more than B is more than C is more than A ¨ amount amount amount ¨ defect defect defect ¨Preference reversal ¨ ¨Evaluability effect ¨Our evaluation of options is only based on the information immediately available. ¨We do not consider relative value of possible alternatives if they are not available. ¨Preference reversal ¨ ¨Evaluability effect ¨ ¨Loss aversion ¨We invest more into avoiding losses than into achieving gains (of the same value). Daniel Kahneman Amos Tversky C:\Users\Taaanique\Desktop\Kahneman.jpg C:\Users\Taaanique\Desktop\Amos_Tversky.jpg ¨People avoid uncertainty. ¨ ¨(Daniel Bernoulli) ¨Situation A: ¨You have been given $1,000. You are now asked to choose one of these options: 50% chance to win $1,000 OR get $500 for sure ¨ Situation B: You have been given $2,000. You are now asked to choose one of these options: 50% chance to lose $1,000 OR lose $500 for sure 40 pieces ¨ Kahneman & Tversky ¨Situation A: ¨You have been given $1,000. You are now asked to choose one of these options: 50% chance to win $1,000 OR get $500 for sure ¨ ¨50% chance of $1,000 or $2,000 ¨OR ¨100% chance of $1,500 ¨ Situation B: You have been given $2,000. You are now asked to choose one of these options: 50% chance to lose $1,000 OR lose $500 for sure 40 pieces 50% chance of $1,000 or $2,000 OR 100% chance of $1,500 ¨ Kahneman & Tversky Kahneman & Tversky C:\Users\Taaanique\Desktop\coursera-ariely-behavioral-econ.png Certain $1,500 gain Uncertain $1,000 or $2,000 gain Situation A: $1,000 given 50% chance to win additional $1,000 OR get $500 for sure Situation B: $ 2,000 given 50% chance to lose $1,000 OR lose $500 for sure 40 pieces Certain $1,500 gain Uncertain $1,000 or $2,000 gain Situation A: $1,000 given 50% chance to win additional $1,000 OR get $500 for sure YES!!! No, thanks. Situation B: $ 2,000 given 50% chance to lose $1,000 OR lose $500 for sure 40 pieces Certain $1,500 gain Uncertain $1,000 or $2,000 gain Situation A: $1,000 given 50% chance to win additional $1,000 OR get $500 for sure YES!!! No, thanks. Situation B: $ 2,000 given 50% chance to lose $1,000 OR lose $500 for sure 40 pieces Not if I can avoid it. THANKS FOR THE CHANCE!!! Certain $500 gain Uncertain $1,000 or $0 gain Situation A: $1,000 given 50% chance to win additional $1,000 OR get $500 for sure YES!!! No, thanks. Situation B: $ 2,000 given 50% chance to lose $1,000 OR lose $500 for sure 40 pieces Not if I can avoid it. THANKS FOR THE CHANCE!!! Certain $500 loss Uncertain $1,000 or $0 loss Situation A: $1,000 given 50% chance to win additional $1,000 OR get $500 for sure YES!!! No, thanks. Situation B: $ 2,000 given 50% chance to lose $1,000 OR lose $500 for sure 40 pieces Not if I can avoid it. THANKS FOR THE CHANCE!!! ¨A matter of FRAMING. ¨ ¨Influenced by CONTEXT. ¨A matter of FRAMING. ¨ ¨Influenced by CONTEXT. ¨Three groups: Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. Offered price Dictionary A (10,000 entries, like new) Offered price Dictionary B (20,000 entries, cover torn) Group 1 – simultaneous evaluation $ 19 $ 27 Group 2 – Dictionary A only $ 24 - Group B – Dictionary B only - $ 20 ¨Three groups: Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making, 11, 107-121. Offered price Dictionary A (10,000 entries, like new) Offered price Dictionary B (20,000 entries, cover torn) Group 1 – simultaneous evaluation $ 19 $ 27 Group 2 – Dictionary A only $ 24 - Group B – Dictionary B only - $ 20 ¨Before attempting the first quiz, watch the two videos available in the interactive syllabus in the IS: ¨ Dan Ariely’s TED talk on decision making ¨ Daniel Kahneman’s TED talk on past, present and future selves ¨ ¨Recommended good reading on behavioural economics: ¨Kahneman, Daniel. Thinking, Fast and Slow. ¨Ariely, Dan. Predictably Irrational. ¨Ariely, Dan. The Upside of Irrationality. C:\Users\Taaanique\Desktop\problem-big1.jpg