PSYCH Thinking Exam 1

Choose between Option A: (1, $500) Option B: (0.5, $1000)

According to expected value theory, what option should a person choose? 

The probability of the two options are the same (1*500=500) = (.5*1000=500), so EVT doesn’t have a preference between the two options.

Choose between Option A: (1, $500) Option B: (0.5, $1000)

According to expected utility theory, what option should a person choose?

Both options are the same expected value of 500, so it depends on the person’s risk tolerance (risk aversion vs risk seeking).

Choose between Option A: (1, $500) Option B: (0.5, $1000)

Which option do most people choose? 

Most choose option A because of risk aversion- where they prefer the certainty of $500

Choose between Option A: (1, $500) Option B: (0.5, $1000)

Does the choice that people make in the above situation (i.e., your answer in #3) demonstrate…

A. loss aversion?

B. a violation of descriptive invariance?

C. a violation of transitivity?

D. risk aversion?

D. risk aversion?

Do you think risk aversion is rational? Should we try to overcome it? 

I think risk aversion is rational because in many situations, caution prevents people from acting recklessly and losing out rather than taking the safe choice. I don’t think we should try to overcome it unless the odds are very high (i.e., 100% of $100 vs 95% of $300)

In class: risk aversion can be rational because money has diminishing marginal utility. The diminishing marginal utility of wealth is completely rational because it reflects the physical constraints of human time, biology, basic survival needs and adaptation.

E.g., your body satiates (the second dinner adds nothing)

Past a point, money buys things you have no hours to use

Choose between Option A: (0.5, +$150; 0.5, −$100) Option B: (1, $0)

According to expected value theory, what option should a person choose? 

Option A: 0.5*150 + 0.5*-100 = 25

Option B: 1*0 = 0

Should choose Option A

Choose between Option A: (0.5, +$150; 0.5, −$100) Option B: (1, $0)

Which option do most people choose?

Option B

Choose between Option A: (0.5, +$150; 0.5, −$100) Option B: (1, $0)

Is a person who chooses B violating expected utility theory?

No, since theory considers utility, not just the expected money. Depends on person and risk-aversion. 

Choose between Option A: (0.5, +$150; 0.5, −$100) Option B: (1, $0)

 Does the choice that most people make in the above situation demonstrate… 

A. loss aversion? 

B. a violation of descriptive invariance?  

C. a violation of transitivity? 

D. risk aversion? 

A. loss aversion

Do you think loss aversion is rational? Should we try to overcome it? 

I think loss aversion is rational to a certain extent. Sometimes the effect of losing money is greater than the chances of gaining it. However, it can lead to bad economic decisions, like rejecting fair bets.

Describe a study that tested whether loss framing or gain framing was more effective in a teacher incentive program. What did the researchers find?

9 schools were chosen and teachers were given 2 different incentives at random. 1 (Gain Frame) was that a bonus would be given at the end of the year if students improved academically; 2 (Loss Frame) was that the bonus would be paid up front but must be returned if students didn’t show improvement. Both of the bonuses were worth the same amount of money. The researchers found that the loss frame showed the most improvement in students.

What is the endowment effect? Describe a study demonstrating the endowment effect.

Bias where people give higher value to an item simply because they own it (it's an example of loss aversion). The coffee mug study shows this effect, where half the participants chose a mug over chocolate. When given the mug and asked to exchange for chocolate, 89% chose to keep the mug. When given the chocolate and asked to exchange it for the mug, 10% chose the mug.

Come up with your own real-life example of the endowment effect. Make sure the effect does NOT occur merely because of sentimental value, and that your example is similar to the study demonstrating the endowment effect in #12.

Juliet buys a black tank top from a thrift store for $5 and decides to resell it on Depop. The shirt is very basic and she has never even worn it before. When she lists it, she prices it at $20, even though other listings pop up with the exact shirt that have it priced around $8. 

A buyer on Depop, Maria, is looking for a black tank top. She sees Juliet’s listing but decides not to purchase since she is only willing to spend $10 or less on it. She finds another listing and purchases it at a fair price.

Come up with a realistically plausible example of a transitivity violation, and explain why the violation might have occurred.

Elena is on Ticketmaster choosing between 3 seat options for the Olivia Rodrigo concert

Nosebleeds at $60 vs Middle-level seats at $90. 

1.  Elena sees this as $30 for a better view and picks the Middle-level seats

Middle level $90 vs $120 front row seats

2. Elena views this as an extra $30 for best view and picks front row seats

Front row $120 vs nosebleeds $60

3. Elena sees this as double as more for a concert she can see fine from the nosebleeds. She picks the nosebleed seats

Results: Middle seats > Nosebleeds; front row > middle seat; nosebleed > front row is a transitivity violation

This violation may have concurred because of how much the price gap feels between the different tiers. $30 vs $60 gap feels like too much even though they’re basically the same, just upgrades that are stacked.

Come up with your own real-life example of the framing effect that shows how preferences can reverse for essentially identical questions depending on how they are framed. Suggest a way to avoid the framing effect.

Two cafes advertising matcha made from same ingredients and method are pricing it at $8:

Cafe 1 advertises it as “premium matcha latte made with ceremonial-grade matcha”

Cafe 2 advertises it as “12 oz drink containing matcha, milk, and syrup for $8”

Framing might make Cafe 2 seem overpriced.

A way to avoid the framing effect is to focus on the facts, like ingredients used, size, price, and the quality rather than how the latte is advertised.

According to prospect theory, are people risk averse or risk seeking? Explain.

People are more risk averse for gains and risk seeking for losses. This means that they prefer a sure gain rather than a gamble while preferring a gamble over certain loss.

Which aspect of prospect theory best explains risk-seeking or risk-averse behavior?

a) concave function for gains vs. convex function for losses

b) the value function being steeper for losses than for gains.

c) overweighting small probabilities

d) underweighting of high probabilities, with certainty as the exception

a) concave function for gains vs. convex function for losses

How can people be both risk-seeking and risk-averse according to Prospect Theory? What single feature of the value function produces both?

S-shaped curvature of value function.

Concave for gains → risk averse

Convex for losses → risk seeking

(1) Come up with a plausible example of overweighting small probabilities. It should not involve buying lottery tickets or insurance, and it does not have to be primarily about money — think about how people spend attention, time, or worry. 

(2) Then suggest something that might reduce the overweighting in your example and say why you think it would work. 

(3) Finally, consider whether the overweighting in your example is irrational — and if not, what makes some cases of overweighting worth correcting and others worth keeping.

(1) A family is planning a trip to Cancun all-inclusive but they read of a rare incident 5 years back where a couple was robbed when exiting the resort. While the chances of this happening are small, they can’t help but worry and decide whether to choose a different location.

(2) Something that can reduce overweighting is looking up statistics on how safe the location is when compared to where they live rather than just relying on one instance that happened years prior

(3) While it’s rare that this will happen, it’s not completely irrational since being precocious when traveling to new locations can be safer (e.g. not walking alone at night and being aware of surroundings) but completely cancelling the trip may be leaning more towards the irrational side.

Situation 1 X: $1,000 for certain Y: 80% chance of $1,500, otherwise nothing Situation 2 A: 50% chance of $1,000, otherwise nothing B: 40% chance of $1,500, otherwise nothing

What choices do people tend to make in each situation? 

Situation 1- people choose X

Situation 2- people choose B

Situation 1 X: $1,000 for certain Y: 80% chance of $1,500, otherwise nothing Situation 2 A: 50% chance of $1,000, otherwise nothing B: 40% chance of $1,500, otherwise nothing

What is this pattern of choice that most people make (i.e., your answer in #20) an example of? (select all that apply)

a) a violation of expected value theory

b) certainty effect

c) framing effect

d) loss aversion

e) risk aversion

a) a violation of expected value theory

b) certainty effect

e) risk aversion

Situation 1 X: $1,000 for certain Y: 80% chance of $1,500, otherwise nothing Situation 2 A: 50% chance of $1,000, otherwise nothing B: 40% chance of $1,500, otherwise nothing

Prove that the pattern of choice that most people make (i.e., your answer in #20) is a violation of expected utility theory

Situation 1: prefer

X: 1*1000= 1000 > Y: 0.8*1500 =1200

Situation 2: prefer

A: 0.5*1000 =500 < B: 0.4*1500= 600

From situation 1, we can match the inequalities by setting them to same rate (half)

X: 0.5*1000=500 > Y: 0.4*1500=600

But this isn’t consistent with Situation 2, meaning it violates EU theory since the utility functions aren't the same in both scenarios.

Situation 1 X: $1,000 for certain Y: 80% chance of $1,500, otherwise nothing Situation 2 A: 50% chance of $1,000, otherwise nothing B: 40% chance of $1,500, otherwise nothing

Suggest a way to reduce the influence of the certainty effect on your own decisions. 

By calculating the expected value of all options.

Situation 1 X: $1,000 for certain Y: 80% chance of $1,500, otherwise nothing Situation 2 A: 50% chance of $1,000, otherwise nothing B: 40% chance of $1,500, otherwise nothing

Which aspect of prospect theory best explains the choices that people make in this case?

a) concave function for gains vs. convex function for losses

b) loss function being steeper than gain function

c) overweighting small probabilities

d) underweighting of high probabilities, with certainty as the exception

d) underweighting of high probabilities, with certainty as the exception

Define affective misforecasting.

when our predicted emotional reaction to an event is inaccurate

Describe the dormitory assignment study (Dunn, Wilson, & Gilbert, 2003) in 2–3 sentences. What explains affective misforecasting in this situation?

Before receiving dorm assignments, students predicted how they would be living in desirable housing vs undesirable housing. Researchers measured their happiness levels and 2 years later, students in desirable vs undesirable dorms had the same level of happiness even though the predicted happiness was much higher for desirable dorms. 

Focusing illusion explains this effective misforecasting, as the students are so focused on the housing assignment that they don’t consider other factors in happiness, such as social life.

 Describe Schkade and Kahneman’s (1998) California vs. Midwest study. What did participants predict, and what did the actual life satisfaction data show? Why did this happen?

Survey of students living in california and midwest where the participants predict the life satisfaction of students living in the other region. Students from both regions predicted that Californians would have higher happiness levels. The data shows that the life satisfactions were equal in both regions.

This is due to focusing illusion (students focused on things like climate rather than actual day-to-day life in the regions).

(1) Describe a personal or everyday example of the focusing illusion that was not covered in class. In that example, what salient feature was overweighted, and what less vivid factors might matter more?

(2) Using the example you described in (1), describe 2 strategies to counteract the focusing illusion.

Buying a sports car rather than moderate priced car. Buyer focuses on the driving experience and flashyness. However, car will be used to run errands and head to work, will have higher car payments, insurance and gas prices.

1. Picture where you will be driving car during the week realistically

2. Premortem: Imagine you made the wrong decision and why it turned out this way —> Was the sports car too out of budget? Was it annoying not being able to fit anything in the car?

(1) Describe a personal or everyday example of adaptation neglect, and explain how this neglect can lead to poor decisions.
(2) Using your example, describe a strategy that might help the person better account for adaptation when forecasting happiness. Propose something more specific than simply “assume you will adapt faster.”

(1) Getting a bigger house in a gated community

(a) Might feel flashy at first but once you get used to it, feels like any other home. However, not you have more expensive bills and a bigger mortgage, you have to clean more, you miss your old neighbors, etc.

(2) Ask why you want this house rather than how getting it will make you feel. Is it more functional or just novel? Do you really need the space (children, working from home, etc)?

(1) Describe a personal or everyday example of immune neglect, and explain how this neglect can lead to poor decisions..
(2) Using your example, describe  strategies that might help the person better account for psychological immunity when forecasting the duration of negative emotions. Propose something more specific than simply “understand that immune neglect happens.”

1. You apply for an internship you really want but get rejected. You predict you’ll be devastated by the decision, maybe even reevaluating your dream career path. Immune neglect kicks in within days and you start reconstruing it “The internship didn’t pay that much” “it would’ve taken the entire summer”

2. Ask someone who went through this experience how they felt after instead of imagining how you will feel.

(1) What is the peak–end rule? 

(2) Describe two studies that demonstrate the peak-end rule, and explain why their results reveal a flaw in how people evaluate past experiences.

(3) Give an example of a decision that could be distorted by the peak–end rule, and discuss why reliance on the peak–end heuristic can be harmful in this specific example. Propose a strategy that could help counteract reliance on the peak–end heuristic in this example.

1. Tendency of people to judge experience based on how they felt at its peak and end rather than how they felt the entire time.

2. a) Cold hand water experiment- keeping hand in cold water during entire duration (60s) vs longer trial 60s of cold water plus another 30 seconds of slightly warmer water. When asked what trial to repeat, they chose the second one because it was less painful at the end. Flaw- people choose to endure more pain because the ending was slightly less painful, even though the duration of the pain was longer. b) film study of pleasant and unpleasant movies with short/long versions. The participants gave continuous rating while watching and a final overall rating. The length of the film didn’t affect how people rated the film. The overall ratings were predicted by the peak and end effects of the clips. Flaw- people don’t average how they feel during an experience but focus on the highlights.

3. Deciding whether to return to a restaurant. Bad peak was waiting 45 minutes to get a table. Throughout the entire experience though, the meal was the best you;ve had and you got a free dessert. Focusing on the negative peak of this experience would be harmful, as you’d be missing out on a great restaurant experience. A strategy to fight peak-to-end rule would be to list out ALL the negatives/positives of the restaurant like a pros and cons list, not just the highlights. Then decide if you want to keep coming back.

Describe Shafir’s (1993) custody case study, how it illustrates reason-based choices, and why the pattern is irrational.

2 parents fighting for custody. Parent 1 is average in all aspects, nothing particularly positive or negative. Parent 2 has negative and positive aspects (higher income and closer relationship with child but is busier and has health problems). When asked to award custody, most chose parent 2. But when asked to deny custody, the majority also voted for Parent 2.  Participants chose based on how question was phrased- since parent 2 had both positive/negative aspects, was chosen for both. This is an irritation pattern because people are using the same evidence to justify opposite choices- make inconsistent choices from same information.

 (1) What is the disjunction effect (Tversky and Shafir, 1992)? Explain why this effect is irrational in this study.

(2) Give a real-life example of the disjunction effect outside the exam-vacation scenario.

(3) Propose a strategy that could help counteract the disjunction effect. 

1) Disjunction effect is when people are less likely to make a decision when they do not know the outcome of a decision. Study describes taking vacation package thats on sale after a test

a. If pass→ go on vacation to celebrate

b. Fail→ go on vacation to rest before retaking test

c. Unsure if pass/fail→buy nonrefundable fee to delay decision

This is irrational because they choose the same option if they fail/pass exam

2. Waiting to apply for a job until you hear back from one you already applied

   1. If job A accepts, you’ll still apply to job B to have options

   2. If job A rejects, you’ll have to apply to job B

   3. While waiting for job A, you don’t apply yet,

3. Analyze both scenarios→ will realize that waiting is waste of time since you’ll still apply either way

 Describe Arkes and Blumer’s (1985) ski trip scenario. What did most participants choose, and why does it illustrate sunk cost?

• $100 nonrefundable trip to michigan

• $50 nonrefundable trip to Wisconsin (think they’ll enjoy this more)

• Most participants chose to go to Michigan because it was more expensive even though Wisconsin is more enjoyable. 

• Illustrates sink cost because they already spent $150 either way so they should choose which will be more enjoyable. 

Why do you think the sunk cost fallacy happens? List 3 reasons. 

 1) Focus on what we’ve already invested rather than future benefit

2) Don’t want investment to feel like a waste

3) Hard to let go

Come up with your own real-life example of being irrationally affected by sunk cost, and reframe your options in that example so that you can apply “cancellation”.

Buying expensive gym membership but you realize you hate going to that gym. Force yourself to keep going because you already spent the money on it.

Reframe:

1. Keep going to gym you hate because you already paid for it

2. Cancel the membership and spend your time on an activity you like (riding bike)

You are considering purchasing a new sweatshirt and have two options:

X: $30, poor quality (rated 5)

Y: $60, high quality (rated 10)

Currently, you are ambivalent between options X and Y due to the trade-off between cost and quality. Create a decoy option, Z, that would make option Y appear more attractive than option X. Explain why choosing Y over X due to the presence of Z would be irrational.

 Z:$50, medium quality, rated 7

Z is close to Y in price but worse in quality. Seeing Z might make Y look like a better deal, it’s only $10 more expensive, and  you get a quality rating of 10 instead of 7. As a result, someone who was originally undecided between X and Y might become more likely to choose Y.

Choosing Y over X only because Z because an option→ preference was only influenced by option you wouldn’t even pick to begin with

How could you intentionally use the decoy effect to nudge people toward a better choice (e.g., healthier, more sustainable, more socially beneficial)?

Transportation 

1. Monthly subway pass (90+ unlimited rides)

2. Driving car (150 gas/parking, faster, traffic)

3. Single ride tickets (75, 20 rides)

3 Makes monthly pass look better because similar price but way less benefits

How does processing fluency affect judgments of utilities? In answering this question, discuss how the following affect utility judgments. Be specific about the results from the studies. 

• pronounceability of names

• Retrieval difficulty

• order effect

Processing fluency→ how easy/hard something is to process

Pronounceability of names→ participants judge stocks better if they have easy to to pronounce names

Retrieval difficulty→in course evals, students asked to generate either 2 vs 10 examples on how class could improve. 10 examples- rated class higher in difficulty

Order effect→ when experiencing something, previous event creates comparison (something feels easy after you experience something difficult and vice versa)

Choose only one of the three phenomena in #3; you do not need to address all three. (1) Come up with a real-life example in which fluency or disfluency could be used strategically, either to help or to manipulate. (2) Using that example, discuss how you could avoid being influenced by it.

 Talent show→ talent competition coach puts their favored performer at the end so they can be memorable and graded higher. Can counteract this with standard rubric thats scored after every single performance.

When is temporal discounting irrational?

Sacrificing long term health for temporary, immediate gratification.

Give a real-life example of irrational temporal discounting that involves future rewards. Using this example, propose a practical strategy one can use to reduce temporal discounting based on Daniel et al.’s (2013) study on psychological distance.

Wanting to save 5k for dream trip to Mom’s hometown in Italy. However, every weekend you go out and spend $150 clubbing. Temporary experiences provide immediate gratification rather than waiting for larger reward. Strategy: instead of thinking about saving money for vacation in general, imagine specific future event like riding a boat in Venice.

Give an example of relying on an anecdote instead of statistics. What is the name of the principle that this violates? Why is this violation a problem?

ex) My grandpa ate mcdonalds every day and lived until his 90s, mcdonalds can’t be that bad for you. violates law of larger numbers. Ia a problem b/c it doesn’t explain the relationship b/w eating mc donalds and his health and also isn’t representative of  larger population just an individual.

How can media coverage distort people’s judgments through the availability heuristic? Provide a current or historical example.

Media only covers dramatic/rare events and make them seem more likely→ shark attacks aren’t probable but are always in the news.

Ross & Sicoly (1979) found that spouses’ responsibility estimates often sum to more than 100%. Why does availability lead to this pattern? Specifically which aspect of their results support this interpretation? 

Remembering only your own contributions and not others makes you overestimate your own contributions. In study, participants recalled their own contributions more frequently/easily.

Consider the study where sums of contributions of group project members turned out to be greater than 100%. Why is this an example of the availability heuristic? How could the errors be reduced, and why is that also an example of the availability heuristic?

This is availability heuristic because each team member has memories to their own work and uses to that overestimate their contributions. Can be reduced by keeping record of EVERYONES contributions throughout the entire project.

In one sentence, what is the representativeness heuristic?

Tendency to judge probability of something based on previous experience/stereotype.

Come up with your own real-life example of base rate neglect due to use of representativeness heuristic.

Assuming someone who drives a Ferrari sports car is an F1 driver.

An airport uses an automated scanner to flag passengers who may be carrying a prohibited item.

• About 1% of passengers are actually carrying a prohibited item.

• If a passenger is carrying a prohibited item, the scanner flags them 80% of the time.

• Overall, 10.3% of passengers are flagged by the scanner.

A passenger is flagged. Write the formula (using the numbers above) for the probability that the passenger is actually carrying a prohibited item.
(You do not need to compute the final decimal value.)

(0.80*0.01)/0.103

Consider the conjunction fallacy study on Linda the bank teller. Why is it irrational to say that Linda is more likely to be a bank teller and a feminist than to be a bank teller? Why do people make such irrational judgments?

There are less bank tellers+ feminists than there are bank tellers. People make this mistake due to the representativeness heuristic- Linda fits the description of a feminist, therefore they assume she is a bank teller AND a feminist.

Which is more likely?

A. A CEO is under investigation for financial misconduct.
B. A CEO is under investigation for financial misconduct and secretly moved money into offshore accounts.

Why does option B feel more plausible, even though it must be less likely?

A is more likely but B feels more plausible because it makes the story seem more specific and realistic.

Give a real-life example where people might judge: P(A&B)>P(A)

Alex is a successful investment banker

Alex is a successful investment banker and enjoys golfing

Might seem like the second option is more likely because Alex is described as networking-oriented and has a country club membership.

A roulette wheel has landed on black 8 times in a row.
A gambler says, “Red is due.”
What is the correct probability of red on the next spin?
Why does the gambler feel confident?

50%; Gambler feels confident because of gambler’s fallacy

Come up with your own real-life example of Gambler’s fallacy. How would you avoid it?

Expecting a girl because the family already has 4 boys. You can avoid it by looking at probability not just assuming it will happen because it’s “due”

In the asylum judge study, why is it irrational for judges to be more likely to grant asylum after denying the previous case?
What procedural change could reduce this bias?

 (Notes: 

• You may have multiple solutions, but select only the best one. If you provide multiple solutions, we will grade only the first one. 

• Your answer should clearly indicate practical strategies that people can do under these circumstances. 

• Teaching them about Gambler's fallacy is not an acceptable answer.)

Irrational because of gambler’s study where they feel like they must balance out their choices to appear more fair. A procedural change would be to have a set criteria in place for deciding each case, rather than basing it off the previous one.

For each judgment error, name the heuristic that produces it:

• Ignoring base rates

• Believing “random” sequences must look mixed

• Thinking detailed stories are more likely than simpler ones

• Ignoring base rates- representativeness heuristic

• Believing “random” sequences must look mixed- gambler’s fallacy

• Thinking detailed stories are more likely than simpler ones- conjunction fallacy