W9 Rationality

St Petersburg Paradox

Why does buying and selling price not match?

As buyers and sellers focus on differnet aspects of exchange.

Whats irrational about investors?

They tend to sell assets that are increasing in value while keeping assets that have dropped in value.

What is the decoy effect?

• Consumers often use the surrounding context to estimate the value of an option

• So, the presence of a relatively inferior option increases the sales of a relatively superior option...

• Marketing implications?

  • Marketers may introduce a low-end brand (product) just to make another brand (product) look more attractive

  • Keep discontinued old models (e.g., TVs, printers) when the new model is launched

    
    

How can we be biased?

• The first impressions

• Question framing as positive or negative

• Counterfactual thinking

• Ownership and endowment

• Anchoring by the reference point

• Decision context (e.g., irrelevant decoy)