More Heuristics

The endowment effect Classroom –Half of the people are given a coffee mug –Half given mug rates how much money they would be willing to accept to give up the mug –Half without the mug rates how much money they would be willing to pay to buy a mug –The people given the mug ask for more money than the people without the mug are willing to pay.

Why? Owning an item does not seem to make it more attractive Instead, there seems to be pain with giving up the mug Another instance of loss aversion Schema for buying and selling –Buy low, sell high Regret theory –People do not want to enter into situations in which they will experience regret

Regret Theory People may make choices to avoid regret Status quo bias –People would prefer not to make a change –If a change is made, and it goes badly, there is regret. Imagine you come to class and are given a ticket for a drawing to win a prize. You are given the option to trade your ticket with your neighbor before the drawing takes place. Will you trade? This is an even trade, but most people elect to keep their ticket. They would experience regret if the ticket they traded away eventually won the drawing. May also explain certainty effects. Regret if a 1/24 chance occurs.

Status Quo Bias There is a strong tendency to “stay the course.” Why? Omission bias (Baron and Spranca) –People are judged more culpable for actions taken than for actions not taken. –Morally, it is not clear why there should be a difference between omission and commission. People feel more responsible for actions they take than for actions that they fail to take

Insurance example New Jersey and Pennsylvania –Cheap policy that restricts right to sue –Expensive policy that preserves right to sue –Cheap policy default in New Jersey Majority elected to stay with the default –Expensive policy default in Pennsylvania Majority also elected to stay with the default –Once again, this is an example of using information in the environment to aid evaluation People assume that the default is the ‘better’ option.

Omission, Commission & Regret Gilovich & Medvec (1995, Psych Review) What do people regret? –Early studies suggested people regret actions they have taken –These studies were done with college students –Studies with older people suggest that as people age, they tend to regret actions they did not take. How might this affect decisions?