32: Keeping Score
Disposition effect: selling winning stock instead of losing ones.
People always make irrational mental decisions about what to do/sell based on how the item/money was gained or whether the action would count as a win or lose (narrow framing).
A rational decision maker is interested only in the future consequences of current investments.
Sunk-Cost Fallacy: trying to justify earlier mistakes by making irrational choices.
Replacing old decision maker is a good way to avoid sunk-cost fallacy, because the new decision maker is more capable of making rational decisions based on current opportunities.
Result of sunk-cost fallacy: poor jobs, unhappy marriages.
“Regret is an emotion, a punishment that we administer to ourselves. Intense regret is what you experience when you can mostly easily imagine yourself doing something other than what you did.”
Regret and blame are both evoked by a comparison to a norm.
Action triggers a stronger emotional reaction (including regret) than in action.
The asymmetry in the risk of regret favors conventional and risk-averse choices.
Parents are willing to pay a premium to protect their children from even a slight increase of chance of getting hurt, but they don’t realize that the money can be spent better else-where (narrow-framing). Even the best parents have a finite amount of mental and financial resource to take care of their children.
“The dilemma between intensely loss-averse moral attitudes and efficient risk manage mene does not have a simple and compelling solution.”
Regret and hindsight bias often go hand by hand.
Do not put too much weight on regret.
“We normally experience life in the between-subject mode, in which contrasting alternatives that might change your mind are absent.”
“We assign things or events into categories, and we have norms within each categories. Judgments and preferences are coherent within categories but potentially incoherent when objects are evaluated in between categories.”
In single case evaluation our brain automatically compare the subject with other cases in the same category, and comes up with a decision. However, when subjects from two categories are put into a joint evaluation, the decision may not be consistent (donation to dolphin protection vs. farmer protection: one is dolphin vs. other animals, the other is skin cancer vs. other disease).
“Of course, you should be wary of joint evaluation when someone who controls what you see has a vested interest In what you choose.”
Decision Making Questions
34. Frames and Reality
- Would you accept a gamble that offers a 10% chance to win $95 and 90% chance to lose %5?
- Would you pay $5 to participate in a lottery that offers a 10% chance to win $100 and 90% chance to win nothing?