In the material on Framing, you were invited to respond totwo lotteries. They are replicated here.Which of the following biases and errors could explain why somerespondents to these two lotteries may apparently “flip their preferences”? Please select all that apply.1 point Risk aversion over gains Loss Aversion Risk seeking overlosses Mental Accounting Endowment Effect
Question
In the material on Framing, you were invited to respond totwo lotteries. They are replicated here.Which of the following biases and errors could explain why somerespondents to these two lotteries may apparently “flip their preferences”? Please select all that apply.1 point Risk aversion over gains Loss Aversion Risk seeking overlosses Mental Accounting Endowment Effect
Solution
The biases and errors that could explain why some respondents may apparently "flip their preferences" in response to these two lotteries include:
-
Risk aversion over gains: This is the tendency to prefer a certain gain over a gamble with a higher or equal expected value. If a respondent is risk-averse, they might prefer a sure gain in one lottery but switch their preference in another lottery where the sure gain is less certain.
-
Loss Aversion: This is the tendency for people to prefer avoiding losses to acquiring equivalent gains. If a respondent is loss-averse, they might prefer a lottery where they have a chance to avoid a loss, even if it means potentially missing out on a gain.
-
Risk seeking over losses: This is the opposite of risk aversion over gains. If a respondent is risk-seeking, they might prefer a gamble where they have a chance to avoid a loss, even if it means potentially missing out on a gain.
-
Mental Accounting: This refers to the tendency for people to separate their money into different accounts based on various subjective criteria, like the source of the money and the intended use for the money. If a respondent engages in mental accounting, they might treat the potential gains and losses in the lotteries differently, which could lead them to flip their preferences.
-
Endowment Effect: This is the hypothesis that people value things more highly when they own them. In the context of these lotteries, if a respondent feels a sense of ownership over a potential gain, they might be more likely to choose a lottery where that gain is more certain, even if the other lottery has a higher expected value.
Similar Questions
In choices that involve uncertainty, our judgments are affected not only by the framing of the choice in terms of the level risk, but also by the framing of the choice in terms of gains or losses.Group of answer choicesTrueFalse
Which psychological bias is Anderson overlooking when he relies on the unanimous decisions of the Wealth Management Investment Committee?A.Social proofB.Confirmation biasC.Gambler’s fallacyD.Anchoring biasE.Optimism bias
Question 9This week, you were introduced to the Disposition Effect, which highlights the way in which many people’s preferences “flip” from Decision A to Decision D—even though A & C are identical, as are B & D. [Note: There is more than one correct answer]Which of the following aspects of Prospect Theory help(s) to explain this violation of the Invariance Axiom (select all that apply).
Question 13Art galleries sometimes encourage customersto take paintings home and try them out for a while, offering to give a fullrefund if the customer subsequently wishes to return them. The stores areobviously counting on most customers holding onto the piece of art. Which biasbest explains why, even if we were uncertain about the item when we saw it inthe gallery, we are much more likely to keep it once we’ve displayed it athome?1 pointAvailability Heuristic Loss AversionDisposition Effect Mental Accounting House Money Effect Endowment Effect Anchoring
Question 6There is lots of evidence to suggest that we are inclined totreat “money won” differently from “money earned.” Which of the following biases is best able toexplain this phenomenon, which often results in our being more willing togamble with money that we have won, rather than earned? 1 point Loss Aversion Risk Seeking over Losses Endowment Effect Mental Accounting Disposition Effect
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.