Applying theory in practice

What is the core idea of Applying psychological theorys in practice

Social problems originate in human psychology (e.g. environmental degradation, public health crises, all problems of human behaviour, cognition, and decision-making). Therefore, sustainable solutions require changing these psychological factors.

What is the Four-Stage Cycle and what are the 4 stages

Idea: framework for applying social psychology to solve social problems

Stage 1: Problem Diagnosis - Identify the specific, modifiable behaviour that significantly contributes to the social problem

• ex: speeding causing injuries

Stage 2: Theoretical Analysis of Behavioural Antecedents - Use psychological theory to understand why people engage in the problematic behaviour.

• ex: To get to a destination faster

Stage 3: Theory-Based Intervention Design - Develop interventions that directly target the significant antecedents identified in Stage 2.

• ex: Fines for speeding

Stage 4: Scientific Evaluation - Systematically assess whether the intervention worked and why.

• people love money

Stage 1: Problem Diagnosis

Objective: Identify the specific, modifiable behaviour that significantly contributes to the social problem.

• Ex: Analysis revealed moped accidents were strongly linked to speeding (a deliberate traffic violation) rather than accidental errors or memory lapses.

Stage 2: Theoretical Analysis of Behavioural Antecedents

Objective: Use psychological theory to understand why people engage in the problematic behaviour.

• Select appropriate theoretical frameworks (like the Theory of Planned Behaviour) to diagnose the psychological roots (e.g., Are attitudes the problem? Are social norms the driver?).

• Critical Finding in Case Study: For moped speeding, attitudes and norms were significant predictors, while perceived control was not. This demonstrates that different behaviours have different psychological drivers.

The Theory of Planned Behaviour (TPB) can be used for stage 2 and is a key diagnostic tool for volitional behaviours, what three determinants does it examine

1. Attitudes: Personal evaluations (e.g., "Speeding gives me freedom and excitement")

2. Subjective Norms: Perceived social pressure (e.g., "My friends approve of speeding")

3. Perceived Behavioural Control: Beliefs about capability/constraints (e.g., "I can easily avoid speeding")

Stage 3: Theory-Based Intervention Design

Objective: Develop interventions that directly target the significant antecedents identified in Stage 2.

• Process:

  • Design must correspond to theoretical analysis

  • If attitudes are problematic → create interventions to change evaluations

  • If norms are problematic → create interventions to shift social perceptions

  • If control is problematic → create interventions to enhance capability or remove barriers

• Example Interventions Proposed:

  • For attitude change: Campaigns emphasizing severe risks of speeding to counterbalance perceived benefits

  • For norm change: Publicizing examples of peers who disapprove of speeding to alter perceived social approval

Stage 4: Scientific Evaluation

Objective: Systematically assess whether the intervention worked and why.

• Multi-Level Assessment:

  • Did it change the targeted antecedents? (e.g., Did attitudes become more negative?)

  • Did it change the behaviour? (e.g., Did speeding decrease?)

  • Did it impact the social problem? (e.g., Did accidents decline?)

What is the dual process of stage 4

• Practical: Improve intervention effectiveness

• Theoretical: Test psychological theories in real-world settings

The Moped Safety Case Study: Province of Drenthe, Netherlands; moped riders 22× more likely in accidents than average road users.

Use the 4 stage cycle to anaylse this

Stage 1 Outcome: Speeding identified as primary problematic behaviour (conscious violation, not accident).

Stage 2 Analysis (via TPB):

• Attitudes: Generally positive (speeding associated with freedom, thrill, defiance)

• Norms: Strong peer approval of speeding

• Control: Not significantly related to behaviour (riders felt they could choose)

Stage 3 Intervention Design:

• Target attitudes: Highlight severe consequences to make risk perceptions more salient

• Target norms: Use social modelling to show that many peers actually disapprove

• Ignore control: Since it wasn't predictive, no need for capability-building interventions

Stage 4 Implication: Evaluation would need to measure changes at all three levels (attitudes/norms → behaviour → accidents).

In the moped safety case study, what was the key finding from the Stage 2 analysis using the Theory of Planned Behaviour (TPB)?

The analysis revealed that attitudes (e.g., speeding = freedom) and subjective norms (e.g., peer approval) were significant predictors of speeding, but perceived behavioural control (e.g., ability to avoid speeding) was not. This proved that different behaviours have different psychological drivers.

Explain the Principle of Impact Maximization

Applied efforts should be concentrated where a psychological intervention would have the greatest societal effect. This guides decisions on which problems, behaviours, antecedents, and techniques to focus on.

What is Theory-Practice Reciprocity?

The relationship between theory and practice is a two-way street. Theories guide intervention design, and the real-world results of those interventions test and refine the theories themselves.

What is the Scientist-Practitioner Model?

The applied psychologist operates in dual roles:

• Scientist: When diagnosing problems and evaluating outcomes (Stages 1, 2, 4).

• Practitioner: When designing and implementing interventions (Stage 3).
  This ensures both scientific rigor and practical relevance.

What is the formal definition of Applied Social Psychology?

The systematic application of social psychological constructs, principles, theories, intervention techniques, research methods, and research findings to understand or ameliorate social problems.

Distinguish between the three levels of psychological knowledge: Constructs, Principles, and Theories.

• Constructs: Fundamental, inferred building blocks (e.g., Attitudes, Values, Norms).

• Principles: Statements describing how a basic psychological process works (e.g., Cognitive Dissonance, Foot-in-the-Door).

• Theories: Integrated sets of principles that describe, explain, and predict events (e.g., Theory of Planned Behaviour).

Constructs are the pieces. Principles are the rules. Theories are the complete framework.

What is the fundamental difference between Basic and Applied Social Psychology's approach?

• Basic (Deductive): Starts with a Theory and tests its utility across behaviours (Theory → Application).

• Applied (Inductive): Starts with a Problem and examines which theories best explain the behaviour causing it (Problem → Theory).

Explain Kurt Lewin's maxim: "There is nothing so practical as a good theory."

A good theory is indispensable for application because it:

1. Provides an explanatory framework for root causes.

2. Guides diagnosis by pointing to critical factors.

3. Generates intervention strategies by specifying which "levers" to pull.

4. Aids interpretation of findings.

What are the four core scientific values shared by both basic and applied research?

1. Accuracy: Meticulous, error-free information gathering.

2. Objectivity: Minimizing bias in data collection and evaluation.

3. Scepticism: Accepting findings only after verification through replication.

4. Open-mindedness: Accepting valid evidence even when it contradicts held beliefs.

List the five levels of causality that interact to shape behaviour.

1. Individual Factors: (e.g., personality, values).

2. Social Factors: (e.g., conformity, obedience).

   • Key Studies: Asch (conformity), Milgram (obedience), Stanford Prison Experiment (role power).

3. Situational/Contextual Factors: (e.g., availability of bins, environmental stressors like heat/crowding).

4. Cultural Factors: (e.g., shared norms).

5. Biological Factors: (e.g., evolutionary preferences for landscapes).

What is the key takeaway from the debate on health promotion regarding the role of values in applied work?

Applied social psychology is not value-free.

• Choosing what to study reflects your values

• Be self-aware and state your value position

• Keep methods objective and data-driven

Bottom line: Values guide your choices. Science guides your methods. Be honest about both.

Explain the difference between statistical significance and practical significance.

Statistical Significance: Whether a result is likely not due to chance.

Practical Significance: The real-world impact of a finding, determined by its effect size. A tiny correlation (e.g., r = .034) can be practically huge (e.g., saving 34 lives per 1,000 with aspirin).

Why is the "Knowledge-Deficit Model" considered a flawed theory for intervention?

It assumes people fail to act because they lack knowledge, so the solution is education. Research shows that while knowledge can be necessary, it is rarely sufficient. Motivation is the key driver, making information campaigns ineffective for motivation-based problems (e.g., smoking, energy conservation).

Explain the three functions of theory in applied work (The "USE" Cycle).

• Understand: Theory acts as a diagnostic framework to identify the root causes of a problem.

• Solve: Theory prescribes which psychological "levers" to target in an intervention.

• Evaluate: Theory provides a framework to test the intervention's success and the theory's own real-world validity.

According to Rational Choice Theory, how could you increase public transport use?

By altering the individual's subjective perception of costs and rewards. For example, increase the perceived costs of driving (e.g., tolls, parking fees) or increase the perceived rewards of taking the bus (e.g., faster commute, free Wi-Fi).

What are the three pillars used to organize social psychology theories?

1. Social Thinking: How we perceive our social world (e.g., Attribution Theory).

2. Social Influence: How others change us (e.g., Compliance, Elaboration Likelihood Model).

3. Social Relationships: How we relate to others (e.g., Prejudice, Bystander Intervention).

Explain the Fundamental Attribution Error.

The pervasive bias where we attribute others' negative behaviour to internal causes (their character), while attributing our own negative behaviour to external causes (the situation). (e.g., "They cut me off because they're selfish" vs. "I cut them off because I was running late").

How does Cognitive Dissonance Theory explain behaviour change?

When a person holds two conflicting cognitions (e.g., "I am environmental" and "I drive a gas-guzzler"), it creates an uncomfortable tension. They are motivated to reduce this by changing their behaviour, changing their attitude, or adding a justifying cognition (e.g., "The bus is unreliable").

What are the three direct determinants of Behavioural Intention in the Theory of Planned Behaviour (TPB)?

1. Attitude toward the specific behaviour.

2. Subjective Norms (perceived social pressure from important others).

3. Perceived Behavioural Control (belief in one's ability to perform the behaviour).

What is the Compatibility Principle in the TPB?

Predictions are strongest when all constructs are measured at the same level of specificity. For example, an attitude toward "taking the bus to work tomorrow" will best predict the behaviour of "taking the bus to work tomorrow," not a general attitude toward "public transport."

According to the Elaboration Likelihood Model (ELM), what are the two routes to persuasion?

• Central Route:People think carefully about the message, leading to strong and lasting attitude change. Occurs when the issue is personally relevant.

• Peripheral Route: Relies on superficial cues (e.g., attractiveness of the speaker). Leads to weak, temporary change. Occurs when relevance is low.

Distinguish between Stereotypes, Prejudice, and Discrimination.

• Stereotypes: Cognitive (beliefs about a group).

• Prejudice: Affective (negative attitude/feeling toward a group member).

• Discrimination: Behavioural (unequal treatment based on group membership).

According to Contact Theory, what four conditions are necessary for intergroup contact to effectively reduce prejudice? ( how group together happy)

1. Equal Status between the groups.

2. Common Goals to work toward.

3. Intergroup Cooperation (not competition).

4. Institutional Support for the positive interaction.

What two key principles explain the Bystander Effect?

1. Diffusion of Responsibility: In a group, individuals feel less personal obligation to act.

2. Pluralistic Ignorance: In an ambiguous situation, people look to others for cues; if everyone else appears calm, they define the situation as a non-emergency.

What is the "Generality-Applicability Trade-off" in theory?

As theories become broader to explain more phenomena, they can become too general to be useful for precise intervention design. They may "fit" any situation but offer poor prediction.

Explain the concept of "Use-Inspired Research" (Pasteur's Quadrant).

This research paradigm transcends the basic/applied dichotomy. It is research driven by a real-world problem, which leads to both practical solutions and fundamental theoretical advancements. This is the ideal model for applied social psychology.

What is the core principle of Skinnerian Behaviourism for understanding behaviour?

The principle of "Selection by Consequences": Behaviour is shaped and maintained by its outcomes. People act to gain positive consequences (rewards) and avoid negative ones (punishment).

Explain why "Distant and Uncertain" consequences are weak motivators, with an example.

The power of a consequence depends on how "Soon and Certain" it is. Distant/uncertain consequences are weak.

• Example (Smoking): The "soon and certain" pleasure of a cigarette powerfully reinforces the behaviour, overwhelming the "distant and uncertain" consequence of death from disease.

What is the Three-Term Contingency (A→B→C)?

The core framework for behavioural analysis and intervention:

• Antecedent (A): An environmental stimulus that cues the behaviour (e.g., a "SALE" sign).

• Behaviour (B): The specific, observable action (e.g., entering the store).

• Consequence (C): The outcome following the behaviour, which determines its future frequency (e.g., getting a discount).

List the four main Antecedent Strategies.

Interventions that change behavior by altering what comes before the behavior.

1. Education & Training: Imparting knowledge and/or skills.

2. Prompts: Reminders at the time and place of the behaviour.

3. Modelling: Demonstrating the desired behaviour.

4. Behavioural Commitment: Obtaining a formal promise to perform the behaviour.

List the three main Consequence Strategies.

1. Penalties: Administering a negative consequence to decrease an undesired behaviour.

2. Rewards: Administering a positive consequence to increase a desired behaviour.

3. Feedback: Providing information on behaviour or its outcomes to make consequences more salient.

What are the main risks and drawbacks of using Penalties as an intervention?

• Require extensive enforcement.

• Elicit negative emotions (resentment, unfairness).

• Undermine trust.

• Behaviour typically reverts when enforcement stops.

What is the Overjustification Effect in the context of rewards?

If people attribute their behaviour to an external reward, their intrinsic motivation for that behaviour may decline. When the reward stops, the behaviour is likely to cease as well.

According to Cialdini, what are the six principles of social influence? ( whether to say yes or no)

1. Consistency: Desire to act in line with past actions and commitments.

2. Social Proof: Looking to others to determine correct behaviour. ( full resteraunt)

3. Authority: Deference to legitimate experts.

4. Liking: Greater compliance with people we know and like.

5. Reciprocity: Obligation to repay favours or gifts.

6. Scarcity: Valuing things that are limited or dwindling.

How does the Foot-in-the-Door (FITD) technique relate to the Principle of Consistency?

Gaining compliance with a small initial request (e.g., a small sticker) creates a self-perception of being "helpful." Agreeing to a larger, related request later (e.g., a large sign) becomes an act of consistency with that self-image.

What is the Hypocrisy Effect, and how does it combine commitment and dissonance?

A two-step technique:

1. Elicit a commitment to a value (e.g., make a speech on safe sex).

2. Remind the person of their past failures to live up to that value.
   This maximizes cognitive dissonance, leading to strong behavioural change.

Distinguish between Descriptive and Injunctive norms.

• Descriptive Norms: Perception of what is commonly done (e.g., "Most students drink").

• Injunctive Norms: Perception of what is commonly approved/disapproved (e.g., "My friends think binge drinking is bad").

What is the Social Norms Approach to reducing binge drinking?

It corrects misperceived norms (e.g., students overestimate how much their peers drink). By publicizing the accurate, healthier norm, the intervention uses social proof to pull behaviour toward the actual norm.

What is Psychological Reactance, and how can it be avoided?

The aversive motivational state people feel when their freedom is threatened, leading them to do the opposite of what is requested. Interventions must be designed to minimize perceived threats to autonomy to avoid this backfire effect.

What is McGrath's "Three-Horned Dilemma"?

The fundamental, unavoidable trade-off in research design between three desirable qualities. It's impossible to maximize all three in a single study:

1. Precision (Internal Validity): Confidence in causal conclusions.

2. Generalizability to Situations (Ecological Validity): Applicability to real-world settings.

3. Generalizability to People (Population Validity): Applicability to the broader population.

What is the "Dilemmatics" solution to this research dilemma?

Accept that no single study is flawless. Instead, construct a programme of research that uses multiple, complementary designs. The converging evidence from studies that maximize different qualities provides a robust, well-rounded understanding.

What are the two defining features of a True Experiment?

1. Manipulation of the Independent Variable (IV) by the researcher.

2. Random Assignment of participants to conditions.

What is the primary strength and primary weakness of a True Experiment?

• Strength: Maximizes Precision (Internal Validity) . It is the gold standard for establishing causality.

• Weakness: Low generalizability to both people (population validity) and situations (ecological validity).

Why is Random Assignment so powerful?

It creates groups that are probabilistically equivalent on all possible characteristics (age, personality, etc.) before the manipulation. Therefore, any difference in the outcome after the manipulation must be due to the manipulation itself, eliminating person confounds.

Distinguish between Mundane Realism and Psychological Realism.

• Mundane Realism: How much the study's surface-level setting and procedures mirror the real world.

• Psychological Realism: How much the psychological processes experienced in the study mirror those in the real world. A lab experiment can have high psychological realism even with low mundane realism.

What is the primary strength of Correlational Research?

It maximizes Generalizability to Situations (Ecological Validity) by studying relationships between variables as they naturally occur in real-world settings.

Why can't Correlational Research prove causality?

A correlation between X and Y has three possible explanations:

1. X causes Y.

2. Reverse Causality: Y causes X.

3. Third-Variable Problem: A third variable Z causes both X and Y.

How can Longitudinal Designs help address the issue of reverse causality?

By measuring variables at multiple time points. For example, showing that violent game play at Time 1 predicts aggression at Time 2, after controlling for aggression at Time 1, provides strong evidence against reverse causality (that aggression caused the game play).

What is a Quasi-Experiment?

A design where the researcher manipulates an IV but lacks random assignment for at least one key variable. Participants are assigned to groups based on a pre-existing characteristic (e.g., gender, chronic gamers vs. non-gamers). It offers a compromise between precision and ecological validity.

What is a common example of a Quasi-Experiment (Person-by-Treatment design)?

A 2x2 design with one manipulated variable (e.g., type of game: violent vs. non-violent) and one measured, pre-existing variable (e.g., gender: male vs. female). This tests if the treatment affects different types of people differently (an interaction).

What is the primary strength of Survey Research?

It maximizes Generalizability to People (Population Validity) . Its goal is to accurately represent a larger population by studying a carefully selected, representative sample.

What is the key difference between a survey that uses a convenience sample and one that uses a representative sample?

Only a survey with a representative sample (selected through systematic sampling techniques like random or cluster sampling) can legitimately generalize its findings to the broader population. Convenience samples cannot.

According to the rules for deciding between designs, what should you do if you can only conduct a single study?

Do what has not been done before. Analyze the existing literature and fill the most glaring methodological gap. If the field is full of lab experiments, your most valuable contribution might be a field study or a survey.

What are the two core functions that goods serve for consumers?

1. Utilitarian Function: The practical, instrumental use of a product (e.g., a watch tells time).

2. Identity (Symbolic) Function: Using products to communicate something about oneself to others and to oneself. Goods act as extensions of the self and tools for self-expression.

Explain the concept of "Brand Personality" and "Self-Congruity."

• Brand Personality: The set of human characteristics associated with a brand (e.g., rugged, sophisticated, rebellious).

• Self-Congruity: Consumers prefer brands whose perceived personality matches their actual self-concept or their ideal self (who they want to be). Brand use becomes a non-verbal signal of identity.

According to Belk, what does the statement "We are what we have" mean?

Possessions are not merely a reflection of identity; they actively construct and reinforce our sense of self. Owning certain goods can evoke the feelings and self-perceptions associated with them (e.g., feeling more successful driving a luxury car).

What are the two dimensions of the Vaughn framework for categorizing goods?

1. The Thinking-Feeling Dimension: Is the product chosen for practical performance (Thinking/Utilitarian) or emotional appeal (Feeling/Symbolic)?

2. The Involvement Dimension: Is the decision high-involvement (infrequent, expensive, high-risk, requires deliberation) or low-involvement (frequent, cheap, habitual, automatic)?

What are the four quadrants of the Vaughn Matrix and their corresponding advertising strategies?

• Quadrant 1 (High Involvement/Thinking): (e.g., cars, appliances)

  • "I need to make the right choice"→ Ad strategy: Focus on detailed information, specifications, and value.

• Quadrant 2 (High Involvement/Feeling): (e.g., sports cars, designer fashion)

  • "This says something about me"→ Ad strategy: Focus on image, emotion, and lifestyle association.

• Quadrant 3 (Low Involvement/Thinking): (e.g., detergent, razors) →

  • "Just pick one I recognize" → Ad strategy: Use simple, repetitive cues to establish habit and brand recognition.

• Quadrant 4 (Low Involvement/Feeling): (e.g., soft drinks, beer)

  • "This feels good"→ Ad strategy: Create positive affective associations via imagery, music, and celebrities.

What is the key limitation of the Vaughn framework?

Vaughn framework - classifies products and advertising strategies by two dimension

Involvement High vs. Low

Processing Thinking vs. Feeling

It is a heuristic, not a rigid law. Products can shift quadrants based on context or consumer perception (e.g., coffee can be a low-involvement habit or a high-involvement gourmet experience).

How does the Theory of Planned Behaviour (TPB) explain deliberate buying?

Deliberate buying is predicted by Behavioural Intention, which is determined by:

• Attitude: Personal evaluation of buying the product.

• Subjective Norm: Perceived social pressure from important others.

• Perceived Behavioural Control (PBC): Belief in one's ability to perform the purchase.

What important extension improves the TPB's prediction of buying intentions?

Adding Identity Similarity—the congruity between the product/brand's image and the consumer's self-concept—significantly improves prediction. This reinforces the identity function of goods.

What is the definition of Impulse Buying?

(Rook, 1987) A sudden, powerful, and persistent urge to buy immediately. It is characterized by spontaneity, little reflection, diminished consideration of consequences, and often occurs without a pre-shopping

Explain the mechanism behind impulse buying as a "Self-Control Dilemma."

It arises from a conflict between a long-term goal (e.g., save money) and an immediate hedonic goal (e.g., enjoy this treat). Self-control fails when the temptation is highly desirable/accessible and when self-control resources are depleted.

For example, you want to save money but buy a $7 coffee because it smells great, the shop is right there, and you've had a long day.

What is Ego Depletion, and how does it affect impulse buying?

Ego Depletion - The idea that self-control is a limited resource that gets used up.

Self-control resources are finite and can be drained by tiredness, stress, distraction (cognitive load), or alcohol. When depleted, the impulsive system overpowers the deliberate system, making impulse purchases more likely.

Under conditions of low self-control, what becomes a better predictor of behaviour—explicit or implicit attitudes?

Implicit attitudes (automatic, spontaneous evaluations) become better predictors of behaviour than explicit (conscious, deliberative) attitudes when self-control resources are low (e.g., under high cognitive load or after alcohol consumption).

How do marketers strategically engineer environments to trigger impulses?

• Create Temptation: Make things look, smell, or feel irresistible. Free samples lower your defenses—once you try it, you're more likely to buy it.

• Deplete Resources: Wear you down mentally and physically. Confusing store layouts make your brain tired. Long shopping trips exhaust you. Offering alcohol lowers your self-control. When you're drained, you're more likely to give in.

• Leverage Reciprocity: Give you something "free." Even if it's small, people feel a natural urge to return the favor—often by making a purchase they weren't planning to make.

What are the three distinct psychological routes through which advertising influences consumers?

1. The Cognitive Route: Persuasion through argument processing or heuristic cues.

2. The Affective Route: Attitude change through evaluative conditioning.

3. The Subliminal Route: Influence by increasing brand accessibility below conscious awareness.

head, your heart, or below your radar.

According to Cognitive Response Theory, what is the key to persuasion?

The key is not simply message recall, but the recipient's own thoughts (cognitive responses) generated in response to the message. Persuasion occurs when the balance of thoughts is favourable (more pro-attitudinal thoughts than counterarguments).

Explain the "Message-Processor Fit" principle from dual-process theories.

Effective ads must match the consumer's processing style:

• For consumers with high motivation/ability → Use strong, logical arguments (Central Route).

• For consumers with low motivation/ability → Use persuasive heuristic cues like celebrities or popularity stats (Peripheral Route).

What is Evaluative Conditioning?

The affective route to persuasion. A neutral stimulus (e.g., a brand) acquires an affective response through repeated pairing with a valued, emotionally charged stimulus (e.g., pleasant music, beautiful imagery). It transfers feeling, not beliefs.

Make people feel good around your brand — they'll associate the feeling with you.

What are the boundary conditions for Evaluative Conditioning to be effective?

changing how someone feels about a thing by pairing it with something they already like or dislike

• It primarily affects implicit attitudes, and only for consumers with weak prior attitudes toward the brand.

• The conditioned attitude only influences behaviour under conditions of low self-control/cognitive depletion.

• It is most strategically used for feeling goods (perfume, jewellery).

Evaluative conditioning works best for unfamiliar brands, feeling-based products, and when people aren't thinking carefully.

What is Subliminal Advertising, and does it work as "mind control"?

Presenting stimuli (e.g., a brand name) below the threshold of conscious awareness to increase its cognitive accessibility. Modern research shows it is NOT powerful mind control. It can increase choice of a primed brand only if:

• The consumer already has a positive/neutral attitude toward it.

• The consumer has a pre-existing need (e.g., is thirsty).

• The brand is not already highly familiar.

How can social psychology help promote pro-environmental or healthy products?

By moving beyond utilitarian arguments ("saves money") and leveraging identity appeals. Frame the behaviour (e.g., buying an electric car) as an expression of a modern, innovative, or caring identity, making it identity-congruent.

Sell the person they become, not just the money they save. "Electric car drivers are forward-thinking, innovative people."

What is the foundational assumption of traditional (neo-classical) economic theory regarding human behaviour?

Subjective Expected Utility (SEU) Theory: Humans are rational actors who calculate the expected value (probability × utility) of options and choose the one that maximizes their utility (pleasure/pain). This is a prescriptive, normative model.

Why did economics shift from Cardinal to Ordinal Utility, and what did this achieve?

• Cardinal Utility: A psychological, absolute measure of pleasure (hard to measure).

• Ordinal Utility: A simple ranking of preferences based on observed choices (A > B).
  This shift purged psychology from economic theory, creating a "pure" model based only on observable behaviour (choices), paralleling Behaviourism in psychology.

What is an "Anomaly" in the context of economic theory?

An observation that contradicts the predictions of the dominant rational choice theory (SEU). These anomalies led to a scientific crisis and the development of new, psychologically realistic models.

Dominant Rational Choice Theory (SEU) - People make decisions by calculating

What is Loss Aversion, and why is it a key anomaly?

We are wired to feel the pain of a loss more intensely than the pleasure of an equivalent gain.

Losing €100 feels psychologically more painful than gaining €100 feels pleasurable. This asymmetry is NOT accounted for by traditional SEU theory, which treats gains and losses as symmetrical.

What are the three core insights of Prospect Theory?

A model of how people actually make decisions under risk.

1. Reference Dependence: Outcomes are evaluated as gains or losses relative to a reference point (e.g., status quo), not as final states of wealth.

2. Loss Aversion: The value function is steeper for losses than for gains.

3. Diminishing Sensitivity: Each additional unit of gain or loss has a smaller psychological impact.

How does the reference point determine whether a Christmas bonus is experienced as a gain or a loss?

If a bonus is expected (based on past years), it becomes part of the reference point. Not receiving it is then perceived as a loss, even though your final wealth is the same as if you never expected it. This is an example of Personal Reference.

Explain the "Hedonic Treadmill."

People adapt to positive changes.

1 You get a raise — satisfaction spikes

2 New salary becomes the normal reference point

3 Satisfaction returns to baseline

4 You now want another raise

Gains feel temporary. Aspirations keep rising. Happiness stays flat.

What does the Ultimatum Game demonstrate about economic behaviour?

It demonstrates the power of Social Reference and fairness norms. People reject unfair offers (even at a cost to themselves) to punish inequality, and proposers offer fair splits to avoid rejection. This contradicts the purely selfish "rational actor" model.

people value fairness over pure self-interest.

What is the Principle of Dual Entitlement?

This is a rule people unconsciously use to decide whether a price feels fair or unfair based on Situational Reference:

• The usual price of an item

• The posted price you see

• The normal profit a business makes

Consumers are entitled to the reference price.
If a store charges more than the usual price (say, raising the price during a storm), people see it as unfair. It feels like the business is inflicting a loss on them.

Firms are entitled to their reference profit.
If a store simply removes a discount and goes back to the regular price, people find that much more acceptable. It feels like the business is just foregoing a gain rather than taking something away from the customer.

How does loss aversion explain the Disposition Effect in investing?

Disposition Effect - The tendency to sell winning investments too early and hold losing investments too long.

Investors hold losing stocks too long (reluctant to "realize" a loss by selling, hoping to avoid it) and sell winning stocks too early (eager to "lock in" a gain). Selling a loss is psychologically more painful.

What is Mental Accounting?

The cognitive process where people compartmentalize their finances into separate, non-fungible "accounts" (e.g., savings, holiday fund). This leads to irrational behaviour, like treating a loss in one account as separate from a gain in another.

You have $50 in "savings" and $50 in "fun money." A concert ticket costs $50. You won't take it from savings, but you'll happily take it from fun money — even though it's the same $50 either way.

How does Framing influence decision-making in the "Asian Disease Problem"?

Framing manipulates the reference point.

• Gain Frame (e.g., "lives saved") leads to risk-averse choices (preferring the sure thing).

• Loss Frame (e.g., "lives lost") leads to risk-seeking choices (gambling to avoid the sure loss), even though the outcomes are logically identical.

What are the four rules of Hedonic Framing for maximizing perceived utility?

Presenting the same information to make it feel like a gain (good) or a loss (bad).

1. Segregate Gains: Multiple small gains feel better than one large gain. - Two $50 bonuses feel better than one $100 bonus.

2. Integrate Losses: One large loss feels better than many small losses - One $200 fine feels better than four $50 fines.

3. Integrate Small Loss with Larger Gain: Deduct a loss from a larger gain (it feels like a reduced gain, not a pure loss) - You earned $1,000, minus $50 in fees" feels better than "$950

4. Segregate Small Gain from Larger Loss: Offer a "silver lining" (a small gain) alongside a big loss - Your flight is delayed 3 hours, but here's a $10 drink voucher

What is the Endowment Effect?

The tendency to value an item more highly simply because you own it. Giving it up feels like a loss. This is demonstrated by the gap between Willingness to Accept (WTA) to sell (high) and Willingness to Pay (WTP) to buy (low).

e.g. You buy a mug for $5. You now refuse to sell it for less than $10. But you wouldn't pay $10 to buy it.

What is Status-Quo Bias?

A preference for the current state of affairs or the default option. It is driven by loss aversion (change feels like a potential loss), inertia, and the perception of the default as an implicit recommendation.

What is the Sunk-Cost Fallacy?

The tendency to continue investing in a failing project because of resources already invested (sunk costs), which are irrecoverable. It's driven by loss aversion and an unwillingness to "waste" prior investment by admitting failure. The rational rule is to ignore sunk costs.

What is Hyperbolic Discounting, and what problem does it cause?

A pattern where people discount future rewards steeply in the short term, but more gradually for longer delays.

This leads to present bias—a strong tendency to grab immediate rewards, causing self-control problems like procrastination and failure to save.

Spend now, save later — later never comes, We value the present too much and the future too little — until the future becomes the present.