Summaries meeting 1

1. Eric van Dijk (2010). Thinking and deciding like an economist.

Introduction

This article is an introduction about the course. The course reveals the psychology underlying economic behavior. Psychology and economics developed as two different disciplines, but have many interests in common because economic behavior is essentially social behavior. However, the way that decision-making is modeled in economics differs from how psychologist view decision-making. The dominating view in economics is to picture decision-making as a rational process, in which decision-makers aim to maximize their own utility, while knowing their own (stable) preferences, and being able to deal with the most complex situations.

The rational economic man (assumptions according microeconomics):

• knows his preferences, and these are assumed to be stable.

• is greedy and adage is: “more is better”

• knows his budget constrains, and succeeds in maximizing utility, given these constrains.

• Is selfish and only seems to care about the own outcomes (not that of others)

• Does not have any emotions

In total a rational economic man: non-social and non-emotional and cares about preferences, income and prizes.

Overview Course:

In the course these assumptions will be tested and if the rational man is a valid model for the way people take decisions in real life. In other words, it will be tested whether homo economics belong to the same species as homo sapiens.

The following issues will be presented:

• limited information processing

• dealing with uncertainty

• (in)stability of preferences

• the difficulty of predicting

• the role of emotions

• the importance of self-interest, fairness and altruism

Figure 1: shows that preferences are stable. They show indifferent curves that depicts all combinations of goods and are equally attractive to the decision maker.

Figure 2: shows more indifferent curves and shows that “more is better”. The farther away from the origin, the higher the utility.

Figure 1 & 2: show that the more CD’s you have got, the less prepared you are to give up books to get even more CD’s.

Figure 3: shows also the budget line. Only all combinations on or below the budget line can be obtained.

Figure 4: shows the highest indifference curve if you allocate your entire budget.

2. Schwartz, B. (2000). Self-determination – The tyranny of freedom. American Pscyhologist, 55(1), 79-88.

Abstract

Americans now live in a time and a place in which freedom and autonomy are valued above all else and in which expanded opportunities for self-determination are regarded as a sign of the psychological well-being of individuals and the moral well-being of the culture. This article argues that freedom, autonomy, and self-determination can become excessive, and that when that happens, freedom can be experienced as a kind of tyranny. This resulting in increasing in people’s dissatisfaction with their lives and in a clinical depression.

Introduction

Nowadays, there is a lot of flexibility concerning construction of objectives and the rules of “the game”. Consequence is that this enhances the role of the self-determination (article about). The preassumption is that self-determining is a good thing (e.g. freedom and autonomy). Determination of the self is defined as: people that are free to determine what kind of self they will have and what kind of people they will be. Thus, the fully self-determined self is one that is completely unconstrained-by habit, by social convention, or by biology. Operating without constraint, the self-determining self makes choices in the world to maximize his or her preferences, in keeping with the principles of rational choice. However, it is the central argument of this article that this aspiration to self-determination, is a mistake, both as an empirical description of how people act and a normative ideal. It is a mistake because when self-determination is carried to extremes, it leads not to freedom of choice but to tyranny of choice.Unconstrained freedom leads to paralysis and becomes a kind of self-defeating tyranny. It is self-determination within significant constrains - within rules of some sort - that leads to well-being, to optimal functioning.

Rational-choice theory has tried to explain human preference and choice by assuming that people are rational choosers. According to the choice theorist, human beings have well-ordered preferences that are essentially impervious to variations in the ways the alternatives they face are described or the ways they are packaged or bundled (just like a buffet). A self is just a bundle of preferences that happen to coexist inside a single skin, and self-determination is just the unfettered pursuit of those preferences. However, rational-choice theory is largely silent about where preferences come from and say that the power and validity of the model will be unaffected by it. Human beings violate the principles of rational choice routinely. So, the nature and origins of preferences themselves are important.

Nowadays, the range of choices we face, even among similar kinds of things, is overwhelming, so this task is daunting. So, how do people make choices? One way of thinking is the idea that they organize the world of possibilities into a set of distinct categories etc. Within each category, it may be relatively easy to express preferences. Between categories, however, expressing preferences is more problematic. But how do we decide to which categories to divide the world into? The choice theorist’s story about preference and choice has nothing to say about the first two questions. They are many factors that might influence the way in which people categorize possibilities, for example habits and cultural norms. However, one of the triumphs of modernity is that we celebrate as a culture is precisely the breakdown of categories like these. This is at least part of what self-determination means; people get to create their own categories. In this way, more of the self is open to self-determination than ever before. To choose so that preferences are maximized, people must know what is possible, and so the theory of rational choice assumes that people choose with complete information. However, perfect information is a myth. Factors other than rational deliberation seem to govern choices, for example: habits and traditions. Because of constrains, is actual rational choice possible, that help to solve the information problem. So, traditional constrains on choice may tell people in which domains of their lives the principles of rational choice are allowed to operate (e.g. cultural traditions about the moral).

In recent years, investigators of preference and choice have come to see some of the limitations of the rational-choice framework and have tried to make it more realistic. Central is the work of Kahneman and Tversky that highlights the significance to choice of the manner in which alternatives are framed. They suggested that the way people frame their psychological accounts is important. But what determines which accounting system people actually use? People are influenced by legal and social sanctions, by customs and traditions, and by old habits. These psychological accounting practices in different cultures are quite different from ours, but they are no more or less reasonable. An attempt to extend self-determination to everything would break down the habitual practices people use. One way of thinking about laws in general is as constrains on human activities (e.g. traffic laws and not like gravity). The liberation of the individual from traditional constrains, is experienced by only a minority of human beings. So, one has to be mindful of cultural-specific constrains and opportunities in considering the operation of any particular model of choice. Culture also influence the self (independent cultures vs. interdependent cultures). So, in conclusion choice is constrained in the way that language is constrained and to much freedom from constraint is a bad thing.

Tyranny of freedom: the evidence

Schwartz said that it is only a slight exaggeration to say that for the first tome in human history, in the contemporary United States large numbers of people can live exactly the kind of lives they want, unconstrained by material, economic, or cultural limitations. This facts coupled with the helplessness theory of depression (lack of control will lead to clinical depression) might lead one to expect clinical depression in the US to be going the way of polio. Instead, what we find is an explosive growth in the number of people with depression. So, there is a puzzle. The solution according Schwartz to this puzzle lies, in several features of modern life:

1. Increases in experienced control have and expectations about this control. Excessive emphasis on self-determination has contributed to these unrealistic expectations.

2. American culture has become more individualistic than ever before. People do not only expect perfection in all things, but they expect to produce this perfection themselves and will blame themselves when not accomplished (promote depression).

3. The emphasis on individual autonomy and control may be undermining a crucial vaccine against depression: deep commitment and belonging to social groups and institutions etc. The more people focus on themselves the more their connections to others will be weakened.

So, the current literature on helplessness, control, and depression suggests that freedom of choice is not all it’s cracked up to be, at least not with respect to psychological well-being.

Conclusion

Article suggested two things:

1. Although we could live in a world in which everything was a matter of choice, we don’t have to, and most people in the history of human society haven’t.

2. Were we to live in such a world, our mechanisms or rational choice would be overwhelmed rather than empowered.

For some people is all this freedom a cause for celebration. Schwartz however said that there is a dark side. It leaves people indecisive about what to do and why. So, there is a price for freedom: danger. There is a price for enlightenment: uncertainty. So by offering individuals self-determination without constraint we are not doing them a favor. According Schwartz is the role of the psychology to pull back from this stance. Psychology must figure out the “grammar” of human life choices – the set of constrains (e.g. culture) that actually enables freedom rather than impeding it. Psychology must (instead of should) tell people something about what they should be trying to get. So, a positive psychology will have to be willing to tell people that, say, a good, meaningful, productive human life includes commitment to education, commitment to family and to other social groups etc. This contradicts the vision of a good life based on freedom, autonomy, and choice.

3. Iyengar & Lepper (2000). When choice is demotivating: Can one desire too much of a good thing?

Abstract

Current psychological theory and research affirm the positive affective and motivational consequences of having personal choice (assumption = the more choice, the better). The three studies in this article challenge this implicit assumption that having more choices is necessarily more intrinsically motivating than having fewer. The studies show that people are more likely to purchase gourmet jams or chocolates or to undertake optional class essay assignments when offered a limited array of 6 choices rather than a more extensively array of 24 or 30 choices. Participants reported greater subsequent satisfaction with their selections and wrote better essays when their original set of options had been limited.

Introduction

It is a common supposition in modern society that the more choices, the better. This is shown by many studies that demonstrated for example that there is a link between the provision of choice and increases in intrinsic motivation, perceived control, task performance, and life satisfaction. The recurring empirical finding from these studies is that the provision of choice increases intrinsic motivation and enhances performance on a variety of tasks. There are however some limitations to this literature. The number of options, for example, was characteristically small (between 2 and 6 alternatives). It would appear, then, that these research has shown that choice among relatively limited alternatives is more beneficial than no choice at all. So, interesting is what will happen when the range of alternatives becomes larger and the differences among options become relatively small? Of course, there are cases when this will still have benefits (e.g. items on a menu) but a growing body of research suggest that people can have difficulty managing complex choices. In fact, studies show that the selection, evaluation, and integration of information are all clearly affected by the available number of options, which suggest that people tend to simplify their decisions by relying on simple heuristics. The three studies presented in this article, therefore, examine for the first time the possibility that there may be differential motivational consequences of encountering contexts that offer a limited versus an extensive number of choices. Specifically, the choice overload hypotheses underlying these studies is that, although the provision of extensive choices may sometimes still be seen as initially desirable, it may also prove unexpectedly demotivating in the end. So, the present studies tested the hypothesis that having a limited and more manageable set of choices may be more intrinsically motivating than having an overly extensive set of choices.

Study 1

The first study used consumers that were shopping in a grocery store that encountered a tasting booth that displayed either a limited (6) or an extensive (24) selection of different flavors of jam. The two dependent variables were: initial attraction to the tasting booth and their subsequent purchasing behavior.

Results

• 60% of the customers who passed the extensive-selection stopped at the booth while only 40% stopped when they passed the limited-selection ... conclusion: variety is probably more attractive.

• Main result: 30% of the consumers in the limited-choice condition subsequently purchased jam while only 3% of the consumers in the extensive-choice condition did.

Discussion

These results challenge the rational-choice assumption that the more is better. These findings show that an extensively array of options can at first seem highly appealing to consumers, yet can reduce their subsequent motivation to purchase the product. Some possible limitations are that maybe consumers in de limited-choice condition believed that there was something special about the specific jams displayed after they became aware of the multitude of other options available on the shelf. Also, maybe the 24 jams motivated a different consumer group that was just curious instead of more serious intended. Also possible is that the consumers in the extensive condition felt more time or/and pressure. In sum, one might question whether the obtained differences in motivation would be eliminated if participants in both conditions were given the opportunity to peruse their options in an unconstrained, nonpublic context.

Study 2

This experiment was done in a educational setting, in which actual performance and choice could be observed. So, participants in the limited-choice condition were not aware of any options beyond those in the limited-choice set. Students in an introductionary social psychology class were given the opportunity to write a two-page essay as an extra credit assignment. The students were given ether 6 or 30 potential essay topics on which they could choose to write. Intrinsic motivation was assessed by comparing the percentage of students who completed the assignment across the two conditions and the quality of the essays written in each condition.

Results

• 74% of the students in the limited-choice condition turned in the assignment while only 60% did in the extensive-choice condition.

• Students in the limited-condition performed better and had scored higher than those in the extensive-condition.

Discussion

The results from study 2 confirmed and expanded the findings in study 1. Because none of the participants thought that their essays would be evaluated, the quality of the paper they wrote should have been primarily a function of their personal interest and motivation. So, study 1 and 2 support the hypothesis that extensive-choice context may be initially more appealing but are subsequently more likely to hamper people’s intrinsic motivation. However, these studies shed little light on the mediating mechanisms underlying choice overload. So, what are the processes that produce the decreases in subsequent motivation exhibited in contexts that offer extensive choices? One possibility is that people encountering overly extensive choices use a heuristic that leads them to feel less committed to exercising their preferences. So, this choice is merely satisfactory, rather than optimal. A contrasting possibility is that choosers in extensive-choice contexts may actually feel more committed to the choice-making process; that is, that they feel more responsible for the choices they make because of the multitude of options available. This may inhibit choosers from exercising their choices, out of fear of later regret. So, this kind of choosers will find it more enjoyable but on the same time frustrating and more difficult.

Study 3

This study tested whether these two hypotheses are true. Participants made a selection from either a limited array or an extensive array of chocolates. Subsequently, participants in the experimental groups sampled the chocolate of their choosing, whereas participants in the control group sampled a chocolate that was chosen for them. Participants’ initial satisfaction with the choosing process, their expectations concerning the choices they had made, their subsequent satisfaction with their sampled chocolates, and their later purchasing behavior served as the four main dependent variables. Also a control group was this time included.

Results

• Participants spent significant more time deciding which chocolate to sample when there were 30 chocolates than they did when there were only 6.

• Participants who encountered 30 chocolates reported feeling that they had been given “too many”, whereas participants who encountered 6 chocolates reported feeling that the number of alternatives was “about right”.

• Participants in the limited condition were more satisfied with their samples chocolates than in the extensive condition.

• Participants in the limited-condition (48%) were significantly more likely to choose chocolates as compared with participants in the extensive-condition (12%) and the control-condition (10%).

• There was no evidence for the first hypothesis that choosers in extensive-choice contexts are more likely to use a satisfying heuristic or an optimizing one in a limited-condition.

• Participants encountering the extensive options reported enjoying the decision-making process significantly more (2^nd hypothesis), but found it more difficult and more frustrating than participants who encountered limited options.

General discussion

Study 1,2, and 3 provide compelling empirical evidence that the provision of extensive choices, though initially appealing to choice-makers may nonetheless undermine choosers’ subsequent satisfaction and motivation. Study 3 showed that both choosers’ reported using a satisfying heuristic. There were no differences in participants’ report satisfaction, their feelings made an informed choice, or their tendency to opt for a default choice. Study 3 provided evidence that participants in the extensive-condition enjoy the choice-making process more but also feel more responsible resulting in frustration and dissatisfaction. The authors expect that people that make choices for others will show even greater overload than when making only decisions for themselves.

4. Botti & Hsee (2010). Dazed and confused by choice: How the temporal costs of choice freedom lead to undesirable outcomes.

Abstract

The authors propose that individuals underestimate the costs of making choices relative to the benefits of finding the best option. Specifically, they demonstrate that research participants make systematic mistakes in predicting the effect of having more, vs. less, choice freedom on task performance and task-induced affect. Even, when participants had the information to understand that the costs of choice freedom outweigh its benefits, they still predicted that choice freedom will lead to better performance and more positive affect. As a result those who have the option to choose exercise it, yet end up performing worse and feeling worse than those who do not have that option.

Introduction

People are often willing to undergo extensive searches in order to find the “best” option. Research has, however demonstrated that search processes among choice-set options involve costs. In certain circumstances the costs associated with the time spent searching for the best option may even be greater than the benefits that option provides, resulting in faulty decisions and undesirable outcomes. The paper focus on the temporal costs of choosing and investigate whether individuals area able to discern situations in which freedom of choice should be relinquished because its costs are greater than it benefits. The authors conclude that people tend to underestimate the temporal costs of choosing relative to the benefits of finding the temporal costs. Consequently, decision makers insist on exercising their choice opportunities even when these opportunities lead to poor outcomes.

According rational theory is more freedom always better because it allows decision makers to maximize utility by finding the best match between preferences and available alternatives. From a psychological perspective, more freedom is better because it motivates decision makers to bolster their satisfaction with the choice outcomes. However, more freedom of choice involves more cognitive, emotional, time(also important for the quality of decisions), and money. Although optimal search models in economics assume that individuals would stop searching for the best option if the costs of finding this option outweighed it expected beliefs, research in psychology has shown that people often make faulty decisions because they fail to understand temporal costs. So, there are different costs related to choice freedom that may be direct of indirect cause of faulty decisions: cognitive, emotional, and temporal. But how can we explain peoples’ insistence on exercising choice freedom in the face of its negative consequences? The authors argue that people systematically underestimate the costs of choice compared with its benefits, resulting in the belief that more choice freedom leads to better outcomes than less choice freedom. This belief is true in many cases, because choosers are indeed able to identify the best match between their preferences and the available alternatives. But in some circumstances the cost of choice freedom may exceed the benefits of selecting the most satisfying option, which is a proposed cost-benefit misestimation as a result of overgeneralization.

Direct temporal costs (in the paper) are the monetary losses curred by the investor in her search for the perfect investment opportunity, such as price one has to pay to see more options or the opportunity costs one incurs by viewing more options. In contrast, the indirect temporal costs refer to the emotional distress generated by missing gains and the impairment of the cognitive function cause by distress. In general, the authors hypothesized that despite having all the information about the temporal costs and the benefits of choice freedom, decision makers systematically underestimate the temporal costs relative to the benefits of selecting the best option, and as result expect more positive outcomes in conditions of more choice freedom than in conditions with less freedom. Those who have the option to operate in conditions of more choice freedom will exercise this option, extend their search for too long, and achieve worse outcomes than those who do not have this option. Hence, they expected decision makers to resent having less choice freedom and to seek more choice freedom even in circumstances in which they would in fact profit form choice restriction.

Results study 1

• Predictors forecasted that more-freedom participants would obtain a higher return than less-freedom participants. They also preferred the more-freedom condition

• The average investment return in the more-freedom condition was lower than that in the less-freedom condition.  Conclusion: people oversearched in the more-freedom condition, stopping their search for the best interest rate too late.

• Thoughts about temporal costs did vary and were more likely among less-freedom participants and predictors than among more-freedom participants.

Predictors understood that more choice freedom was normatively superior to less freedom and preferred the option of exercising choice to that of relinquishing choice based on the forecast that greater choice freedom would lead to greater returns on investment. In reality participants in the more-freedom condition underperformed and their overall investment return was lower than that of participants in the less-freedom condition.

Results study 2

• Majority of predictors forecasted that participants who had the freedom to choose would achieve a higher score, would like the test better and would feel better while taking it, compared with those without this freedom. Predictors preferred having choice freedom.

• Even after experiencing the task, the majority of participants thought that having choice freedom, was more likely to lead to a higher test score, more positive affect, and feelings, compared with those without freedom.

• The average performance was lower for freedom than for no-freedom participants and freedom participants had a less positive affective response than no-freedom participants.

• The more positive the affect, the higher the final score, the less trials.

These results show that choice freedom had a negative influence on participants’ affective response during the task, which in turn caused them to engage in fewer trials, resulting in an overall lower sore. Conversely, the greater positive affect of participants in the no-freedom condition increased the number of attempts at memorizing numbers and improved the task performance. The direct temporal costs of choice (fewer trials), rather than its indirect costs (less positive affect), seem to drive the results of study 2.

Results study 3

• Predictors forecasted higher scores, a more positive affect, a better performance, better liking for freedom participants than for no-freedom participants. People preferred the freedom condition. Reason why they preferred this one is because of the ability to select an easy number.

• Participants in the freedom condition performed worse, felt worse than participants in the no-freedom condition

• Mediation: the more negative effect in the freedom condition was associated with lower accuracy and reduced the final score, compared to the less-freedom condition.

Although study 2 and 3 differed from study 1, they replicated the findings. Participants who did experience the task, as well as those who did not, forecasted superior outcome and more pleasant and more pleasant affect in conditions of freedom compared with no-freedom. As a result, all participants expressed their preference for choice freedom. These predictions were incorrect because, despite being clearly quantified, the temporal costs of choice were underestimated relative to the benefits of choice, so that freedom led not only to an inferior outcome but also to worse feelings. When temporal costs were not highlighted (as in study 2), participants in the more freedom condition underestimated the direct effect of these costs, and overchose(direct). When highlighted participants experienced more time pressure and had less cognitive resources for any given question, yet they again underestimated these indirect effects and overchose(indirect).

Results study 4 (moderator familiarity)

• In the unfamiliar condition freedom participants performed worse than no-freedom participants. This difference was not significant in the familiarity condition.

• Freedom participants gained more money in the familiar condition relative to the unfamiliar condition

• Freedom participants felt less positive affect than did no-freedom participants in the unfamiliar condition. In the familiar condition this difference in affect was not significant.

• The difference between freedom participants’ affect in the two familiarity conditions was not significant  conclusion: that familiarity with the questions made it not easier to maintain their positive mood.

• Greater familiarity with the choice task enabled freedom participants the realize that little benefit associated with searching extensively for the best option.

• Freedom participants spent overall more time on the task than no-freedom participants. In the unfamiliar condition, freedom spent more time taking the test, but the same in de familiar condition.

• In the familiar condition, freedom participants correctly answered more questions than no-freedom participants did.

Study 4 results support the cost-benefit misestimation theory against the alternative mood-maintenance theory and also demonstrate the limits of the negative effect of choice freedom. 1. When participants were not given the opportunity to familiarize themselves with the task, those who were free to choose which questions to answer spent more time but were not more accurate than those who were not free to choose; thus, replicating previous results participants in the freedom condition felt and performed worse than those in the no-freedom condition. 2. Greater task familiarity allowed freedom participants to realize that the options were similar to each other and that more extensive, and costly, search would not necessarily lead to a better questions choice. In the familiarity condition, freedom participants spent, therefore, only as much time as no-freedom participants on the task, and they were even more accurate, filling the performance and affect gap between them and their no-freedom counterparts.

General discussion

Preference for freedom of choice is one of the most robust findings in decision-making research. Individuals experience psychological reactance when their freedom to choose is eliminated or threatened with elimination and become depressed if they are not allowed to exercise control over their environment. This preference for choice has been attributed to a basic need for control as well as to sociocultural norms that value decision autonomy. In this paper they proposed a novel explanation for people’s preferences for choosing.

The authors hypothesized that preference for choice is caused by a systematic tendency to underweight the direct and indirect temporal costs of searching for the best option relative to the benefits provided by that option. This relative underestimation of temporal costs causes people to expect more choice freedom to necessarily bring more positive outcomes than less choice freedom, and to seek choice even when it actually leads to worse decisions.

Results from the first three studies provide evidence for this hypothesis by showing that, regardless of the elicitation mode and whether they had experienced the choice task or not, participants predicted higher performance and a more pleasant affective experience in conditions of more freedom than in conditions of less freedom, and expressed their preference for more over less freedom. Contrary to these predictions, study participants who had more freedom performed worse and experienced lower positive affect than participants who had less freedom. The last study, in addition in ruling out an alternative explanation based on mood maintenance, restricts the detrimental effects of choices to situations in which participants are not familiair with the choice taks. Familiarity has been shown to facilitate the matchin between preferences and available alternatives., thereby reducing the disadvantages of choice.

To conclude, although choice is often associated with beneficial outcomes, in some circumstances this association fails. When the costs of making a choice exceed its benefits, choosers experience suboptimal outcomes and unpleasant feelings.

5. Schwartz et al. (2002). Maximizing versus Satisfying: Happiness Is a Matter of Choice.

Abstract

Can people feel worse off as the options increase. The present studies suggest that some people – maximizers – can. Study 1 showed negative relations between maximization and happiness, optimism, self-esteem, and life satisfaction, and positive relations between maximization and depression, perfectionism, and regret. Study 2 found maximizes less satisfied than nonmaximizers (satisfiers) with consumer decisions, and more likely to engage in social comparison. Study 3 found that maximizers are more adversely affected by upward social comparison. Finally, study 4 found maximizers more sensitive to regret and less satisfied in an ultimatum game.

Introduction

The presumed goal of maximization (or optimization) is virtually always unrealizable in real life, because of the complexity of human environment and the limitations of human information processing. Thus, as options proliferate, the likelihood of achieving the goal of maximization goes down and the potential for regret is present. In contrast, a satisfier encounters and evaluates goods until one is encountered that exceeds the acceptability threshold. So, it is about a good enough option instead of the best option. Thus, when options increase, there will have will be no effect and the risk of being made worse off will be minimal. The studies tried to answer a couple of question. Are some people maximizers and others satisfiers? Do people differ in the nature of the goals they pursue in choice situations? And, if so, do people also differ in their sensitivity to potential regret? Is it concern about potential regret that influences some people to be maximizers?

Studies

Study 1: examined the relations between one’s scores on a maximization scale and a regret scale and scores on measurement of happiness, life satisfaction, optimism, depression, neuroticism, and perfectionism. Result: This study provided evidence for individual differences in what people aspire to when they make decisions (maximizers  best possible result vs. satisfiers  good enough result). It was found that maximizers reported significantly less life satisfaction, happiness, optimism, and self-esteem, and significantly more regret and depression, than satisfiers. The study showed also that maximizing and perfectionism are distinct. Discussion: this study tells nothing about the direction of causality and the stability over time. But how is a maximizer to judge whether a given outcome is the best possible outcome? Whereas “good enough” usually can be judged in absolute terms, “the best possible” may often require social comparison (relative position). So, maximizers may be more concerned with relative position, and thus with social comparison, than satisfiers, especially in light of the findings from study 1 that maximizers are generally less happy than satisfiers.

Study 2, guided the notion that maximizers might seek more information than satisfiers when making decisions, by measuring the relation between maximization and the amount of social comparisons that goes into making purchasing decisions, as well the satisfaction people derive from those decisions (regret and happiness). We anticipated that maximizing would predict reports of engaging in more social comparison and experiencing greater regret and less happiness in general. In addition, that maximizing would predict reports of more product comparison, social comparison, and counterfactual thinking regarding purchases. Result: Maximizing was predictive of reports of engaging in social comparison being concerned with what others were doing, and finding upward and downward social comparison more appropriate. Maximizing also predicted product comparison, social comparison, and counterfactual thinking with regard to purchases. Moreover, maximizing predicted consumer feelings, such that those high on maximizing ultimately experienced more regret and less happiness regarding purchases. Furthermore, our findings regarding consumer behavior suggest that social comparisons and product comparisons stimulated counterfactual thoughts, which then engendered regret. Thus, it appears that striving for the best things in life may have paradoxical consequences. The study found no mood enhancing effects of downward social comparison. Discussion: a limitation is that the real-life experiences were recalled by the participants, so it could be biased or incomplete.

Study 3, is inspired by other research that reported that unhappy people are more affected by upward social comparison than happy people and further explored the relation between maximizing and social comparison processes by examining whether maximizers and satisfiers respond differently to social comparison manipulations. Maximizers are expected to be more interested in social comparison feedback and more sensitive to such feedback than satisfiers. The hypothesis was that moods and self-evaluations of maximizers would be more vulnerable or sensitive to unsolicited social comparison information than would those of satisfiers. Study 3 used real-life peer performing and tested the effects of social comparison information provided by the context. Result: The results supported the hypothesis that maximizers would be more affected by social comparison information than would satisfiers. Maximizers who saw their peer solve anagrams faster than themselves expressed greater doubts about their own ability at the task and displayed a greater increase in negative mood than maximizers who saw their peer solve fewer anagrams. Satisfiers, by contrast, showed little or no such response to the social comparison information provided by their peer. The authors speculate that because satisfiers are satisfied with a major, school, or job that is simply “good enough,” they miay not require as much information in general – and social comparisons in particular – as do maximizers. So, study 2 and 3 showed that maximizers seek out and respond to social comparison information each time they try to make the “perfect choice”. Discussion: It would also be interesting to investigate the interest in or seeking of social comparison instead of their response. Also, research must be done in real-life settings.

Study 4, examined the possible causal role of regret in mediating between maximizing and dissatisfaction by exposing participants to a computer game designed to manipulate the potential for regret. The authors suggest that one of the factors that may lead maximizers to experience less happiness and satisfaction with life than satisfiers is maximizers’ increased sensitivity to regret – both experienced and anticipated. A variant of the ultimatum game was used. Result: The results were consistent with many, but not all, of the predictions. In the ultimatum game, male (but not female) maximizers made smaller offers than male satisfiers. Maximizers of both genders offered less when the recipient’s reservation price was going to be revealed (as expected), but unexpectedly, satisfiers offered more when the recipient’s reservation price was going to be revealed. Finally, as hypothesized, maximizers were less satisfied than satisfiers with outcomes generally. However, they were not especially dissatisfied in the condition in which reservation price was revealed, as had been expected. Discussion: It could be that the gender differences for males and femals was caused by more competiveness among males and a greater display of social motivation toward cooperation and fairness among females.

General discussion

The present studies provide evidence for individual differences in the orientation to seek to maximize one’s outcomes in choice situations. Taken together, the studies suggest that although maximizers may in general achieve better objective outcomes than satisfiers (as a result of their high standards and exhaustive search and decision procedures), they are likely to experience these outcomes as worse subjectively. Some reasons why are:

1. To be a maximizer is to want the best option

2. The process of adaption will make virtually every consumption experience less satisfying than one expects it to be (maximizers have higher standards, search costs etc.).

3. Maximizer more likely to depend on social comparison than satisfier

4. It is plausible that maximizers have higher expectations than satisfiers (can lead to disappointment).

Depression results from a lack of control. In a world in which options are few, it is reasonable to think that people will blame the world for disappointing results. But in a world in which the options are many, people will blame themselves. So, in a world of limited options, a maximizer might be more disappointed than a satisfier with the results of his or her decisions without taking personal responsibility for the disappointing results. But in a world of limited options, there is simply no excuse for failure. However, maximizing is not always bad for people’s well-being. Perhaps in the domain of action, greater achievements by maximizers compensate for lower satisfaction with those achievements, whatever they are. It is critical for future research to clarify whether maximizers makes people unhappy or being unhappy makes people maximizers.

6. Dijksterhuis, Bos, Nordgren & van Baaren (2006). On Making the Right Choice: The Deliberation-Without-Attention effect.

Abstract

Contrary to wisdom, it is not always advantageous to engage in thorough conscious deliberation before choosing. We tested the hypothesis that simple choices indeed produce better results after conscious thought, but that choices in complex matters should be left to unconscious thought. Named the deliberation-without-attention hypothesis, it was confirmed that purchases of complex products were viewed more favorable when decisions had been made in the absence of attentive delibertation

Introduction

People generally believe that serious conscious deliberation increases the probability that they will make the “right” choice. This idea applies especially to choices between products that are complex, multifaceted, and expensive. A second pervasive idea is that the quality of a choice benefits form “sleeping on it”. Whereas conscious thoughts refer to thought or deliberation while conscious attention is directed at the problem at hand, unconscious thought can be defined as thought or deliberation in the absence of conscious attention directed at the problem. The scientific literature has emphasized the benefits of conscious deliberation in decision making for hundred of years. In contrast, the notion that unconscious thought is fruitful hardly developed beyond the status of “folk wisdom”. We hypothesize that this view is not justified.

Conscious thought does not always lead to sound choices. Two reasons are that is has a low capacity and suboptimal weighting of the importance of attributes. Conversely, unconscious thought can lead to better choices (e.g. 4 apartments  see lecture) and does not suffer from low capacity. Indeed, it has been shown that during unconscious thought, large amounts of information can be integrated into an evaluative summary judgment. Conscious thought is rule-based and very precise. Unconscious thought can conform to rules in that it detects recurring patterns, as the literature on implicit learning shows. These characteristics led us to postulate the deliberation-without-attention hypothesis, on the relation between mode of thought or deliberation and the complexity and quality of choice. Complexity is defined as the amount of information a choice involves. Conscious thought is hypothesized, due its precision, to lead to good choices in simple matters. However, because of its low capacity, conscious thought leads to progressively worse choices with more complex issues.

Studies

In study 1, the participants read information about four hypothetical cars that had 4 simple attributes or 12 complex attributes, that were either positive or negative. Result: Unconscious thinkers fared relatively well and showed no difference between conditions while conscious thinkers generally made the proper choice under simple conditions, but performed poorly under complex circumstances.

In study 2, the participants were asked about their attitudes toward the four cars instead of asking for a choice (study 1). Result: Conscious thinkers were better able to differentiate the quality of the cars under simple conditions, whereas unconscious thinkers were better to differentiate the quality of the cars under complex conditions.

In study 3, in this study we regressed the amount of thought and the average number of aspects on post choice satisfaction. The more you think about a decision consciously, the less time remains to think unconsciously. Result: As expected, thinking does not make people more satisfied, nor does complexity. The more people thought consciously about simple products, the more satisfied they were with their purchase. Conversely, the more people thought consciously about complex products the less satisfied they were with their purchase.

In study 4, was tested after people bought products in IKEA(complex) and the Bijenkorf(simple). Result: Conscious thinkers reported more postchoice satisfaction than unconscious thinkers for Bijenkorf products. The opposite was true for the IKEA customers in which case unconscious thinkers showed more postchoice satisfaction than conscious thinkers.

Conclusion:

The four studies demonstrated the deliberation-without-attention effect. Conscious thinkers were better able to make the best choice among simple products, whereas unconscious thinkers were better able to make the best choice among complex products.

Limitation, is that IKEA and Bijenkorf may have different samples what will attract different people.

Summaries Meeting 2

7. Kahneman, D, & Tversky, A. (1984). Choices, values, and frames. American Psychologist, 39(4), 341-350.

Introduction
An analysis of decision making distinguishes two types of choices: riskless choices and risky choices.

What is a riskless choice? A typical riskless decision concerns the acceptability of a transaction in which a good or a service is exchanged for money or labor. To put it in a simple way: a riskless choice is a choice where the outcome is known. I pay €5,- and I’m sure to get my groceries for that price.

What is a risky choice? We speak of a risky choice when a decision has to be made without advance knowledge of their consequences. For example, Pakistani General X has to decide whether or not to go to war with the United States (chance of winning 10%, chance of losing 90%). So the choice of an act may be construed as the acceptance of a gamble that can yield various outcomes with different probabilities.

Risky choices were the main subject of a remarkable essay by Daniel Bernoulli (1700 – 1782) published in 1783, in which he attempted to explain why people are generally averse to risk and why risk aversion decreases with increasing wealth. To illustrate risk aversion, consider the following choice:

A. You have 85% chance to win €1000,- and 15% chance of winning nothing. [gamble]
B. You receive €800,- for sure. [sure thing]

A large majority of people prefer the sure thing, although the gamble has higher mathematical expectation than the sure thing, an expectation of 0.85 * 1000 + 0.15 * 0 = €850,-. This human preference for a sure outcome over a gamble that has higher of equal expectation is called risk aversion. The rejection of a sure thing in favor of a gamble of lower or equal expectation is called risk seeking. Bernoulli suggests that people do not evaluate prospects (prospect = a financial expectation or chance decision) by the expectation of their monetary outcome, but by the expectation of the subjective value.

Objective and subjective value: gains
Figure 2 holds a framework to explain risk aversion. Bernoulli proposed that subjective value is a concave function of money (concave = the line of gains is hollow on the inside). This concave function shows that the difference in subjective value of €40,- and €20,- is greater than the difference between €120,- and €100,-. It also follows from concavity that the subjective value attached to a sure gain of €800,- is more than 80% of the value of a gain of €1000,- as in the above illustrated gamble vs. sure thing decision.
Conclusion: people are risk averse when it comes to gains, because we weight the subjective value of a gamble and this is explained by a concave function.

Objective and subjective value: losses
Consider the following choice:

C. You have 85% chance to lose €1000,- (with a 15% chance to lose nothing)[gamble]
D. A sure loss of €800,-. [sure thing]

A large majority of people express a preference for the gamble over the sure loss. This is a risk seeking choice because the expectation of the gamble (-€850,-) is inferior to the expectation of the sure loss (-€800-).

This risk seeking behavior in losses can be explained by a convex function (= hollow on the outside), that is also steeper than the concave function of gains. The difference in subjective value between a loss of €200,- and a loss of €100,- appears greater than the difference in subjective value between a loss of €1200,- and €1100,-.

Because the function of losses is more steep than the function of gains, people express the intuition that a loss of €X is more aversive than a gain of €X is attractive; this is called Loss aversion. So losses loom larger than gains.

Framing of outcomes
Possible outcomes of a gamble can be framed either as gains or losses.

Outcome framed in gains: risk averse.
Consider the following gamble:

A. If program A is adopted, 200 people will be saved [sure thing]
B. If program B is adopted there is 33% chance that 600 people will be saved and 66% chance that no people will be saved. [gamble]

Large majority of the people choose the sure thing, option A. As expected, preferences are risk averse when the outcome is framed in gains.

Outcome framed in losses: risk seeking.

Consider the following gamble:
C. If program C is adopted, 400 people will die. [sure thing]
D. If program D is adopted there is 33% chance that 0 people will die and 66% chance that 600 people will die. [gamble]

Large majority of the people choose the gamble, option D. As expected, preferences are risk seeking when the outcome is framed in terms of losses.
 

Overall conclusion:

• Gains: risk averse = sure thing

• Losses: risk seeking = gamble

• Causes: curves concave (gains) vs. convex (losses)

Quick outline of the rest of the article (non main findings):

• Normal rational choice consist of two principles: dominance and invariance

• Dominance: if prospect A is at least as good as prospect B in every respect and better than B in at least one respect, then a rational being should prefer prospect A.

• Invariance: for a rational being, the preference order between prospects should not depend on the manner in which they are described.

• The fact that we make different choices when the same prospect is framed in gains or losses violate the rational principle of Invariance.

• Low probabilities are overweighted.

• A sure thing is overweighted in comparison with events of moderate/high propability: therefore insurance companies appear more attractive when their message is framed as the elimination of a risk (sure thing) instead of a reduction of a risk (gamble).

8. Van Dijk, E, & Van Knippenberg, D. (2005). Wanna trade? Product knowledge and the perceived differences between the gains and losses of trade. European Journal of Social Psychology, 35(1), 23-34.

Introduction
In this article, the effect of ownership on behavioral decision making in the context of trade is investigated. The authors reason that willingness to trade is a function of perceived similarities between the gains and losses of a trade. This perceived similarity can be influenced by the product knowledge of the trader and this effects the reluctance to trade. (reluctance = tegenzin).

Product Knowledge
Product knowledge taps directly into what we consider to be an important determinant of reluctance to trade: the perceived difference between the objects involved in the trade.

Experiment 1
In experiment 1, knowledge of wine was measured and related the knowledge of the potential traders to perceived differences between wines involved in the trade and the decision whether or not to trade.
1. Participants were endowed with a bottle of wine (Merlot vs. Cabernet Sauvignon).
2. Given an option to trade.

Conclusion Experiment 1

• The more knowledge about wine a participant had, the more he would differentiate between the two wines, and therefore would be less willing to trade.

Experiment 2
In order to rule out the role of individual differences in product knowledge, product knowledge was manipulated in experiment 2.
1. Again participants were endowed with a bottle of wine (Merlot vs. Cabernet Sauvignon).
2. Half of the participants were provided with the same additional wine information.

Conclusion Experiment 2

• Product knowledge affected the perception of differences between the wines. Moreover, the results indicate that the more differences potential traders perceived between the two wines, the more reluctant they were to trade.

Mental Accounting Matters

Mental accounting = the set of cognitive operations used by individuals and households to organize, evaluate and keep track of financial activities.

Components of Mental Accounting:
1. How are outcomes perceived and experienced and how decisions are made and subsequently evaluated?
 

Example 1.
Janet was once shopping for a bedspread. The usual prices for the bedspreads were €200,- (double size), €250,- (queen size), €300,- (king size). But on sale, all were priced at only €150,-. Janet bought the king sized bedspread and was very happy, although the bedspread did hang a bit over the sides of her double bed.
The mental accounting system provides the input to do both ex ante (vooraf) and ex post (achteraf) cost-benefit analysis. Janet’s consumer choice can be understood by incorporating the value of the deal (transaction utitily) into the purchase decision calculus.

2. The assignment of activities to specific accounts.

Example 2.
Richard received a pretty good fee for a lecture in Switzerland. The exchange rates were really high in Switzerland, so already usual high prices were now astronomical. He comforted himself that he had received a fee for the talk that would easily cover the outrageous prices for the hotel and food. Had he received the fee a week earlier for a talk in New York, the vacation would have been much less enjoyable.

The vacation in Switzerland was made less painful because of the possibility of setting up a Swiss Lecture mental account, from which the (high) Swiss expenditures (hotel + food) could be deducted.

Economic principle of fungibility
Fungibility = the property of a good or commodity whose individual units are capable of mutual substitution. Examples of highly fungible commodities are crude oil, orange juice, precious metals and currencies.

Why does mental accounting matter? Because it violates the economic principle of fungibility: money in one mental account is not a perfect substitute for money in another mental account.

Types of Mental Accounts:
Example: Imagine that you are about to purchase a jacket for (€125,-)[€15,-] and a calculator for (€15,-)[€125,-]. The salesman informs you that the calculator you wish to buy is on sale for (€10,-)[€120,-] at their other store, a 20 minute drive away. Would you make the trip to another store.

*Two versions of the problem are given in () or [].

A. Minimal account
Comparing two options by examining only the differences between the two options, disregarding al their common features.
Example: Am I willing to take a 20 minute drive to save €5,- and I would give the same answer in either version.

B. Topical account
A topical account relates the consequences of possible choices to a reference level that is determined by the context within which the decision arises.
Example: Most people say that they will travel to save the €5,- when the item costs €15,- but not when it costs €125,-.
C. Comprehensive account ( = alomvattend)
Incorporates all other factors including current wealth, future earnings, possible outcomes of other probabilistic holdings, and so on. Economic theory generally assumes that people make decisions using the comprehensive account.
Example: W = Wealth and W* = Wealth plus €5,- plus the jacket and the calculator minus €140,-. The choice comes down to the utility of W*. Then the choice comes down to the utility of W* plus(?) €5,- versus the utility of W* plus 20 minutes.

Hedonic Framing = people code combinations of events to an extent that makes them as happy as possible.

Question: why are we willing to drive across town to save money on a small purchase than a large one?

Answer: because of the difference in subjective value between €5,- on a €15,- is higher than the subjective difference between €5,- on €125,-.

Integration and Segregation to maximize utility (and happiness!)

Segregation = splitsen
Integration = combineren/integreren

People:
1. Segregate gains (because the gain function is concave). V(10) + v(5) > v(15). See figure.
1. Example: people prefer gaining 10 euro + gaining 5 euro more than gaining 15 euro.

2. Integrate losses (because the loss function is convex). V(-10) + v(-5) < v(-15).
2. Example: people prefer losing 15 euro at once more than losing 10 euro and than losing 5 euro.

3. Integrate smaller losses with larger gains (to compensate for loss aversion).

4. Segregate small gains (silver linings) from larger losses (because the gain function is steepest at the origin, the utility of a small gain can exceed the utility of slightly reducing a large loss). V(5) + v (-1000) > v(-995).
4. Example: people prefer losing €1000,- but winning €5,- more than only losing €995,-.
 

Types of Mental Accounts humans use:
A. Windfall account (de financiële meevaller):
Arnold’s and his wife packages of fish were lost in transit. They received €300,- from the airline. The couple took the money and spent €225,- on diner. They had never spent that much at a restaurant before.

B. Gift account
Sam admires a €125 sweater from the department store. He decides not to buy the sweater because in the end he thinks it’s too extravagant. Later that month he receives the sweater from his wife as a birthday gift. He is very happy. Sam and his wife have only joint bank account.

C. Vacation account
Mr. and Mrs. J have saved €15.000,- toward their dream vacation home. The money earns 10% in a market account. They just bought a new car for €11.000,- which they financed with a three-year car loan at 15%.

9. Arkes, H, & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124-140.

The sunk cost effect = a greater tendency to continue an endeavor (inspanning) once an investment in money, effort, or time has been made.

Introduction
This paper is an attempt to explain an irrational economic behavior: the sunk cost effect.

Consider the following example:
A man wins a free ticket to a football game. His friend decides to join him and pays €12,- for a ticket. A terrible snowstorm begins. The winner says he isn’t going because of the blizzard, but his friend who paid €12,- insists to go to the game, even though he would have to endure the pain of a snowstorm.

Explanation: from rational view, the €12,- has been paid one goes or not. It is a sunk cost. It should in no way influence the decision to go. But the example explains human behavior and thinking that occurs a lot.

Experiment 2:
Customers who had initially paid more for a season subscription to a theater series attended more plays during the next 6 months, presumably because of their higher sunk cost in the season tickets.

Experiment 3:
3A. As the president of an airline company, you have received a suggestion to use the last 1 million dollars to develop a super plane. Another firm also just began marketing a super plane. Should you invest the last 1 million?
[Yes 10] [No 50]

3B. As the president of an airline company, you have invested 10 million dollars into a super plane. When the project is 90% completed, another firm begins marketing a super plane. Should you invest the last 10% of you research funds into the super plane?
[Yes 41] [No 7]

The difference between the stories is that in question B millions have already been invested, while in question A, nothing has been invested yet.

Conclusion Experiment 3:
Subjects in a sunk cost situation have an inflated estimate of the likelihood that the completed project will be a success.

Explanation of the sunk cost effect:
Thaler’s (1980) explanation of the sunk cost effect is based on prospect theory’s value function.

How can sunk costs be explained by the value function of prospect theory?
1. The subject makes an unsuccessful investment, the investor is now at point B.
2. Because of the convex function of losses, further losses from point B do not result in large decreases in value (“fuck it, a already spent all my money, so let’s spend some more!).
3. However, comparable gains do result in large increases in subjective value (the line gets more steeper from B to A than from B to down below).
4. So compared to a person who is at point A, the person at B is more likely to make a risky investment.

Certainty effect
1. Absolutely certain gains are greatly overvalued.

2. Certain losses are greatly undervalued and certain losses are extremely aversive.
Example: 3B. The decision not to complete the super plane results in a certain loss of 10 million dollars. That’s why people find the other option (continue investing in the super plane, despite the harsh competition) more attractive.
 

10. Soman, D, & Gourville, J. (2001). Transaction decoupling: How price bundling affects the decision to consume. Journal of Marketing Research, 38(1), 30-44.

Introduction
Price bundling is widespread: manufacturers and retailers offer multiple products for a single, bundled price. This article examines the effect of price bundling on consumption behavior.

Example:
Ernie and Bert are serious skiers who have each pre-purchased 4 days worth of lift tickets. Ernie bought his 4 tickets for €40,- each. Bert paid €160,- for a four-day ski pas. After 3 days of good skiing, the weather has gone bad. Who is more likely to ski in spite of the poor conditions?

Rational view: each man should view the money spent on his lift ticket as nonrecoverable or ‘sunk’ and base his decision solely on the additive costs and benefits of skiing in poor conditions.

Coupling
Ernie, who has paid €40,- will perceive little ambiguity as to the cost of skiing any given day; he know 1 day costs €40,-. This lack of ambiguity results in a tight “coupling” between the cost and the benefit of skiing on the 4^th day, leading to a strong attention to sunk costs and therefore a high likelihood of skiing in spite of the poor conditions.
In contrast, Bert, who has paid €160,- for a four day pass, will perceive far greater ambiguity as to the cost of skiing on the fourth day. This ambiguity results in dissociation or “decoupling” of the cost and the benefit of skiing on the 4^th day.

Study 1: bundled vs. unbundled.
In comparison to the example of Ernie and Bert, subjects were presented with a bundled transaction of a ski-pass or an unbundled transaction. The results show that subjects were significantly less likely to ski on the final day after having incurred a bundled expense.

Study 3: psychological causes of transaction decoupling
Which psychological mechanism drives transaction decoupling?

Motivational driven
If transaction decoupling is motivationally driven, subjects would increase decoupling and decrease consumption as the attractiveness of the consumption opportunity declines.

Cognitively difficult
Or did subjects with a bundled pass displayed a high degree of transaction decoupling because it was cognitively difficult to allocate the cost of the pass over the four days of skiing? If decoupling is cognitively driven, we would expect decoupling to increase and consumption to decrease, as it becomes increasingly difficult to allocate the cost of a bundled purchase across individual elements within that purchase.
 

Study 3:

Study 3 was based on buy-two-get-one-free principle retailers often use. Subjects had to imagine that they had to decided to spend €X on two tickets for a theater series and got one ticket for free. For half of the subjects, they identified which of the three plays was the free play, thereby providing little flexibility in allocating costs across the three plays. Finally, the subjects were told that after the first two plays they enjoyed, they were faced with a conflict for the third play. For half of the subjects, the conflict was either a desirable party. For the other half the conflict was an undesirable request to help a friend move.
 

Results study 3:

• When the subject knew they paid for the 3^rd play (because they were told the first play was for free), they would go the play: sunk cost.

• When subjects knew the third plays was for free, they didn’t go the play: no loss aversion.

• But when subjects didn’t know the 3^rd play was for free (ambiguous), subjects seemed to allocate to allocate costs to the 3^rd play opportunistically. Specifically, subjects behaved as if the third play was free when faced with the desirable party, leading to a low likelihood of attending the 3^rd play, but they behaved as if the third play was full priced when faced with the undesirable request to help move a friend, leading to a high likelihood of attending the 3^rd play. This suggests that transaction decoupling can be motivationally driven.

Summaries meeting 3

11. Shafir, E, & TverskyY, A. (1992). Thinking through uncertainty: Nonconsequential reasoning and choice. Cognitive Psychology, 24(4), 449-474.

Introduction

Different states of the world, often lead to different decisions. When making decisions under uncertainty we need to consider the possible states of the world and their potential implications for our desires and actions. Uncertain states may be thought of as disjunctions of possible states: either one state will obtain, or the other. Most conceptions of decision making under uncertainty are consequentialist in the sense that decisions are determined by a consideration of the potential consequences and their perceived likelihood. Choices based on this evaluation are expected to satisfy a basic axiom of decision under uncertainty, known as Savage’s sure-thing-principle (STP)¹.

Example of STP: If a student prefers to go on holiday to Hawaii if he passes or fails for his exam (fig. 1), then he should also prefer to go when his exam’s outcome is not known.

BUT: People do not always choose in a consequentialist manner. Tversky and Shafir (1992) showed that people choose to postpone buying the vacation in the disjunctive case (fig. 1), when the exam’s outcome was not known (uncertain). They suggest that the decision maker lacks a good reason to go in this case, so may prefer to wait until the outcome is known.

This effect is known as the disjunction effect². A disjunction effect occurs when people prefer x (going on holiday) over y (staying at home) when they know that an event A (pass the exam) obtains, and they also prefer x (going on holiday) over y (staying at home) when they know that event A (pass the exam) does not obtain, but they prefer y (staying at home) over x (going on holiday) when it is unknown whether or not event A (pass the exam) obtains.

The disjunction effect amounts to a violation of the STP, and hence of consequentialism, thus leads to nonconsequentialism.

Reasoning and decision making task

In the paper, nonconsequential behavior is explored in several reasoning and decision making tasks. It was suggested that various considerations are weighted differently in the presence of uncertainty than in its absence, giving rise to violations of STP:

Prisoner’s Dilemma’s (PD) that are played once
Two conditions: (1) the opponent’s choice was known (competes or cooperates) or (2) the opponent’s choice was not known.
Results: competition was the most popular strategy in all conditions. The next most frequent pattern (representing 25% of the triads), however, was of the form: compete when the other competes or cooperates, but cooperate when the other’s strategy is not known (important note: regardless of the opponent’s choice, each player fares better by competing than cooperating). This is contrary to STP. This failure to appreciate the force of STP is attributed to people’s reluctance to consider all the outcomes, or their reluctance to formulate a clear preference in the presence of uncertainty about those outcomes. This interpretation is consistent with the finding that, once people are made aware of their preferences given each possible outcome, STP is no longer violated.

Wason’s Selection task (Explained on sheet 29 and 30 of the lecture.)
The effect is explained by different researchers, but have an account of performance on the selection task in common that fails to refer to formal reasoning. Instead people are assumed to focus on items that have been explicitly mentioned, to apply pre-stored knowledge structures, or to remember relevant past experiences. Thus, people find it relatively easy to reason logically about each isolated outcome, but a disjunction of outcomes leads them to suspend logical reasoning.
 

Main conclusions

Patterns of decision and reasoning that violate STP are observed in simple contexts involving uncertainty. These patterns reflect a failure on the part of people to detect and apply this principle rather than a lack of appreciation for its normative appeal. The frequency of disjunction effects substantially diminishes when the logic of STP is made salient.

Disjunctions of multiple outcomes are more difficult to think through and, as a result, are more likely to give rise to nonconsequential reasoning. Shortcomings in reasoning have typically been attributed to quantitative limitations of human beings as processors of information, but such limitations are not sufficient to account for all that is difficult about thinking, because the problems investigated in the article are computationally very simple, involving a single disjunction of two well-defined states.

Important concepts in the article

¹The sure-thing principle (STP): if we prefer x to y given any possible state of the world, then we should prefer x to y even when the exact state of the world is not known.

²Disjunction effect: A disjunction effect occurs when people prefer x over y when they know that an event A obtains, and they also prefer x over y when they know that event A does not obtain, but they prefer y over x when it is unknown whether or not A obtains.

Quasi-magical thinking: refers to the erroneous belief that one can influence an outcome (e.g. the role of a die) by some symbolic or other indirect act (e.g. imagining a particular number) even though the act has no causal link to the outcome. It underlies several phenomena related to self-deception and the illusion of control. The authors suggest that the presence of uncertainty is a major contributor to quasi-magical thinking.

Article 2: Morris, M, Sim, D., & Girotto, V. (1998). Distinguishing sources of cooperation in the one-round prisoner dilemma: Evidence for cooperative decision based on the illusion of control. Journal of Experimental Social Psychology, 34(5), 494-512.

Summary

This article is some sort of extension on article 1 by Shafir and Tversky (1992) and the central question in this article is: what leads people to cooperate in single-round PD games even though social influence is impossible?

The authors’ perspective is that people’s decision making, in practice, is rarely guided by game-theoretic computations of how to optimize outcomes and more frequently guided by rules of thumb or heuristics induced from everyday experiences of social decision making. Two heuristics are according to them particularly important sources of cooperation in single-round mixed-motive conflicts. The matching heuristic¹ and the control heuristic².

The goal of their research is to understand the intuitive decision rule that generates a CDD pattern (see table 1) and to go further than just stating that the CCD pattern was one of several pieces of evidence that human decision making violates the consequentialist principles of rational choice theory (Shafir & Tversky, 1992). It tries to answer the “why?” question. They investigated the relative timing of moves in the PD game and they showed that there is reason to hypothesize that this factor should affect not only the control heuristic but also the matching heuristic.

The researchers found evidence that players in a single-round PD game sometimes cooperate in an illusory attempt to control or influence their counterparts decision (control heuristic). They also identified the boundary condition that this strategy is used by players who act when the counterpart’s move has not yet occurred. Their secondary contribution is in identifying a moderating condition of a previously identified source of cooperation in single-round conflicts --- the strategy of matching the counterpart’s possible cooperation (matching heuristic). The matching strategy occurs more frequently when the counterpart’s move is an event in the past or present rather than in the future.

So to conclude: the vast majority of conflicts do involve nonsimultaneous acts. Hence, in trying to understand how these conflicts are ever resolved cooperatively, it is an important insight that cooperation stems from a control heuristic when one is the earlier mover and cooperation stems from a matching heuristic when one is the latter mover.

Important concepts in the article

¹Matching heuristic: the most accepted explanation for cooperation in the single-trial PD game is that people strive to match acts of cooperation that others do toward them. The matching heuristic is related to the basic social norm of reciprocity. This heuristic functions to protect one from the possibility of being perceived as a nonreciprocator of favors and from the social disapproval entailed.

²Control heuristic: people make decisions involving an uncertain outcome as though their action could influence or control the outcome. “Illusions of control” are incidents in which people follow the control heuristic even though they are making a decision in a domain where no influence or control over the unknown outcome is possible. People do not consciously believe that they can control things, but they nonetheless act as if they can (e.g. betting on a roll of a dice).

12. Van Dijk, E, & Zeelenberg, M (2003). The discounting of ambiguous information in economic decision making. Journal of Behavioral Decision Making, 16(5), 341-352.

Introduction

In this article is investigated to what extend economic decisions are affected by cost and benefit ambiguity.

One typical reaction that has been well documented in the decision-making literature is that people avoid situations involving ambiguity. People avoid taking risks with ambiguous probabilities. This phenomenon is generally referred to as “ambiguity avoidance”. This indicates that decision makers are motivated to choose in such a way that they avoid ambiguous situations. Frisch and Baron (1988) define ambiguity as the “subjective experience of missing information relevant to a prediction”. This interpretation suggests that decision makers may treat ambiguous, inexact, incomplete, or vague information as insufficient information; information will be discounted. Research on the disjunction effect suggests that people discount ambiguous information. The issue is that decision makers are not so likely to base their decisions on ambiguous information.

Research on transaction decoupling provides additional support for the idea that people discount ambiguous information. Soman and Gourville (2001) argued that price bundling¹ may lead to a disassociation or “transaction decoupling” of costs and subsequent consumption.

Example transaction decoupling: people are more willing to ski under poor weather conditions on the fourth day of their ski vacation after having purchased four single $40,- tickets than after having purchased a bundled four-day $160 ski pass. (decision makers are less likely to base their decision on ambiguous information).

It might be concluded that for a combination of cognitive reasons (thinking through ambiguous situations may be cognitively too complex) and motivational reasons (people may lack the motivation to think trough how they would react on ambiguous outcomes) people are likely to discount ambiguous information.

Experiments

Exp. 1: Past research suggest that the driving force behind the sunk cost effect² is that people do not like the prospect of having invested in vein. For this experiment it’s suggested that decision makers discount ambiguous sunk cost information. The experiment was about a choice for participants to continue or terminate plans on a project, while knowing that there have been high, low or ambiguous sunk costs. The results are that participants were more willing to continue a project after having incurred sunk costs and this willingness was not significantly higher in the high than in the low sunk costs condition. More importantly, the results indicated that participants in the ambiguous sunk cost condition were less susceptible to the sunk cost effect than were participants in the low and the high sunk costs conditions and decided to stop the project.

Exp. 2: This experiment researched the question how decision makers deal with ambiguity concerning future outcomes. In order to investigate this, they presented participants a scenario in which they had to imagine that they were considering whether or not to continue their plans to set up a new restaurant, and that they had just learned the results of two surveys on the market potential for a restaurant similar to the one they were considering. There were three conditions: high, low and ambiguous market potential. The results are that participants were more likely to continue with their plans in the high than in the low market potential condition, but when facing ambiguity they were less likely to continue their plans. So again it was proved that people discount ambiguous information.

Exp. 3: This experiment introduced ambiguity about future costs. It was about the choice, after obtaining a membership of a tennis club with monthly costs of €50,-, to continue playing tennis, after developing a tennis elbow in the second month. It was anticipated that participants were more willing to continue playing tennis when the future costs to be paid for the 10 months after cancelation would be €400 rather than when the future costs would be €300. The researchers predicted that participants in the ambiguous future costs condition (max €400 and min €300) would opt to cancel their membership as in the control condition when there would be no extra costs. The results were according to the predictions. Participants in the low and higher future costs conditions, were the least likely to cancel their membership.

Main conclusions

The results of the three experiments are supportive of the notion that decision makers may discount ambiguous information.

Important concepts in the article

¹Price bundling: refers to the practice of combining multiple products or multiple units of the same product for one bundled price.

²Sunk cost effect: the tendency ‘to continue an endeavor once an investment in money, effort, or time has been made’. In more general terms, it refers to people’s inclination to let their current decision be influenced by costs made at an earlier time, even when these prior costs do not affect the objective outcomes of current decisions.

13. Bastardi, A, & Shafir, E. (1998). On the pursuit and misuse of useless information. Journal of Personality and Social Psychology, 75(1), 19-32.

Introduction

When making decisions under uncertainty, one needs to determine what information may prove instrumental and, therefore, perhaps may be worth paying or waiting for, and what information is unlikely to affect (and thus need not delay) the decision at hand.

Contrary to the classical theory of choice, according to which each individual has a clear preference order (or a utility function) over any set of options, recent studies of decision making have shown that people do not have well-defined values and preferences. People like to obtain information and base their decisions on compelling reasons for selecting one option over another. We call a piece of information relevant if it could impinge on the decision in some, perhaps even subtle, way. Thus, information may be relevant because it makes one option look better, or because it makes the decision maker happier. We call a piece of information instrumental only in case this information can alter what decision is made.

Example: if your decision to go fishing depends on whether or not it rains, then, for you, the rain report is instrumental: you will go in one case; you will not go in another. If, on the other hand, you intend to go whether or not it rains, then information about rain could be relevant to you (you may enjoy yourself more, or drive longer), but it is noninstrumental, because you will do the same thing namely, go fishing, regardless of the information.

About the experiments in this paper

The present article documents instances in which people pursue information that would be noninstrumental if it were directly available and explores the effects that such pursuit can have on ensuing decisions. The term noninstrumental is often used to refer in what followed to information that would have no instrumental value were it directly available; such information, the authors argue, can come to acquire instrumental value once it has been sought.

The patterns that the researchers explored are motivated by two assumptions:

1. The pursuit of missing information can lend greater weight to that information, relative to the attention it might have received had it simply been known from the start

2. The contrast between how an uncertainty is resolved and how it could have been resolved often carries logical implications for what decision is made.

These two assumptions are mutually enhancing: the presence of uncertainty and the contrast between potential outcomes motivate decision makers to pursue further information. This, in turn, can put more weight on the obtained information and on the contrast it generates with what might have been. Note, incidentally, that the decision maker needs no engage in active pursuit of the information; it is enough that his or her curiosity be aroused.

People are inclined to postpone decision for the sake of additional information, which they then incorporate in making their choice. The information, sought and then obtained, tends to receive greater attention and often has obvious implications for decision. This pattern manifests itself in everyday decisions faced by consumers.

Main conclusions

Waiting increases weighting:

Waiting for information that appears relevant to a decision can raise the extent to which it is brought before one’s attention and thus increase its influence on choice. It’s a combination between the assumption of increased attention and the contrast between the actual outcome and its alternatives (an increased attention to the contrast between what has obtained as opposed to what might have been) that accounts for this pattern. The presence of uncertainty can occasionally give rise to additional contrasts that lend the obtained information further impact.

Self-Perception and related studies

When internal attitudes are unclear, people construct or infer their attitudes partly on the basis of external cues, including their own behavior. In the experiments in this article, the pursuit of information was salient to the participants, it was perceived as relevant to the decision, and thus it acted as a cue in the construction of preference. This is consistent with previous research showing that for an earlier behavior to affect a later decision, the behavior needs to be perceived as relevant and must be salient. Having engaged in its pursuit, participants focused on the information that had been obtained, and let it influence their decision. Examples of two well-known methods for gaining compliance are the “foot-in-the-door” and the “low-ball” techniques.

Observed Patterns and Rationality

The expression of conflicting preferences in the simple and uncertain versions of the experiments (for example see lecture sheets 51 - 56) may be viewed as inconsistent or even unreasonable. A question remains, however, as to which preference is the “correct” or “true” one, that expressed in the simple or in the uncertain version? From a normative and prescriptive standpoint, the authors suggest that the simple version should be the one that captures true preference.

The pursuit of nonistrumental information and its subsequent misuse anyway are both commonplace and compelling, and have important implications for influence and for compliance, as well as for our everyday decisions.

14. Van Dijk, E., & Zeelenberg, M. (2006). When curiosity killed regret: Avoiding for seeking the unknown in decision-making under uncertainty. Journal of Experimental Social Psychology 43(4), 656-662.

Introduction

The emotion most studied in decision-making is regret, and a basic finding is that people make regret-averse decisions that shield themselves from the possibility of regret.
There are two main strategies to avoid regret:

1. People may prefer choosing alternatives that shield them from feedback on rejected alternatives.

2. After decisions are made, people may avoid information that might indicate that they would have obtained higher outcomes if only they had decided differently.

But decisions that may shield us from regret may at the same time leave curiosity unsatisfied (think about questions like: “What would have happened if I had decided different, would have obtained worse outcomes, or better?”).

The researchers state that curiosity and regret aversion may constitute two opposing forces in decision-making under uncertainty. Whereas regret aversion may induce decision-makers to avoid uncertain information, curiosity essentially entails attraction to uncertain situations. In this article the question “how do curiosity and regret concerns jointly affect decision-making? ” is answered.

Experiment 1: The more I know, the more I want to know

What determines whether curiosity comes into play? Loewenstein’s (1994) “information-gap theory” views curiosity as resulting from a gap in one’s knowledge. Situational determinants may intensify curiosity. First of all, curiosity may be positively related to the knowledge we already have. So, the more we know about something, the more curious we’re about what we do not know about this. So information-gap theory assigns a central role to knowledge people have. These insights are used to investigate the relationship between curiosity and regret aversion in decision-making under uncertainty.

Construct of experiment 1:

Three conditions:

1. One third of participants had to make a choice between receiving €15,- (certain option), or a sealed package (uncertain option).

2. One third of participants had to make a choice between receiving €15,- (certain option), or a sealed package with the additional information that the content was round (uncertain option)

3. One third of participants had to make a choice between receiving €15,- (certain option), or a sealed package with the additional information that the content was not round (uncertain option)

Based on information gap theory, the authors reasoned that additional knowledge about the content should increase curiosity. As a consequence, they also expected that additional knowledge would increase the willingness to opt for the package with the uncertain outcome rather than for the safe €15,- (hypothesis 1).

Besides this hypothesis, the researchers expected that feedback and information about the content of the package will interact. Without additional information about the content of the package, people should be more likely to make regret avoiding choices. In these conditions, participants who will always learn the content of the package (unconditional feedback) should be more likely to opt for it than those who would only learn the content if they choose it (conditional feedback; hypothesis 2). With additional information about the content (i.e. it’s round/not round), decisions may be more based on curiosity. In these conditions, participants who will always learn the content of the package (unconditional feedback) should be less likely to opt for it than those who would only learn the content if they choose it (conditional feedback; hypothesis 3).

The results supported the reasoning (thus information gap theory) that unconditional feedback may either result in increased preference for options with uncertain outcomes (if decisions are driven by regret aversion) or decreased preference for options with uncertain outcomes (of decisions are driven by curiosity).

Experiment 2: If it’s there, I want to know

In terms of Loewenstein’s information-gap theory, the fact that knowledge is out there may by itself generate curiosity because it increases the saliency of the knowledge gap (e.g. parent’s increased curiosity to know the sex of their unborn child the instant this information is known to the doctor). The researchers, being interested in the regret-curiosity link, tested this implication in a decision-making setting, that, according to the theory of regret aversion, would induce a risk-aversive strategy of information avoidance. To investigate their ideas, they designed the “covered-beaker paradigm” in which participants choose between two gambles: they can either gamble by having the experimenter throw a die with beaker 1, or with beaker 2. After having chosen, they learn the outcome of the gamble, which in all cases is low. Subsequently, participants are given the opportunity to find out what they would habe obtained had they opted for the other gamble. This counterfactual outcome is either already out there (i.e., the die is already thrown, but under the beaker), or not (i.e., the day is not yet thrown).

If people follow a regret-aversive strategy, they should decide that they do not want to know the outcome of the other gamble. The researchers hypothesized, however, that information that knowledge is already out there would reduce the risk-aversive strategy of not wanting to know a counterfactual outcome.

The results supported the reasoning. When knowledge is already out there and counterfactual outcomes are already determined, curiosity may win it from the earlier documented preference not to know.

Main conclusions

Current findings suggest that curiosity may be so strong that it overrides regret aversion. There are two known behavioral indicators of regret aversion in decision-making: (1) reluctance to opt for uncertain alternatives that might yield regret, and (2) reluctance to attend to information that might indicate that one made the wrong decision. The findings of the experiments suggest that for both indicators, it may only take some simple and subtle manipulations to increase curiosity and overcome regret aversion.

How do the findings in experiment1 relate to the concept of non-consequential reasoning? The connection may lie in the willingness to think through the consequences in ambiguous situations that evoke curiosity and in situations that do not. More specifically, we propose that without additional information about content of the package, people are unlikely to engage in hypothesis thinking.

15. Van de Ven, N., Zeelenberg, M., & van Dijk, E. (2005). Buying and selling exchange goods: Outcome information, curiosity and the endowment effect. Journal of Economic Psychology 26(3), 459-468.

Summary

This article is an extension on a study by Van Dijk and Van Knippenberg (1996).

According to Kahneman (1992), the endowment effect¹ does not exist for goods which are held for exchange, because “loss aversion² plays little roll in routine economic transactions, in which Sellers and Buyers trade goods for money, both of which were held for that purpose”. Van Dijk and Van Knippenberg, nevertheless, obtained an endowment effect for exchange goods, but only when the value of the exchange good was uncertain. They used a research design in which Position (Buyer vs. Seller) and Uncertainty about the value of the exchange good (Fixed Exchange vs. Uncertain Exchange Value) were manipulated independently of each other. They found that an endowment effect did not occur with a Fixed Exchange Value. Interestingly, however, an endowment effect did emerge in the Uncertain Exchange Value condition. The Willingnes To Accept (WTA) of the Sellers (Dfl. 3.97) differed significantly from the Willingness To Pay (WTP) of the Buyers (Dfl. 2.87). They explained their findings by stating that when the exchange value is uncertain it becomes more difficult to compute the net result of a trade (what is the net result of selling a chip with an uncertain value for $5?). Under these circumstances, Sellers may be susceptible to loss aversion, and thus to the endowment effect.

In this article, the possibility is examined that an additional variable may contribute to the endowment effect, namely the curiosity regarding the uncertain exchange value.

Through two experiments the present study resulted in a number of interesting observations. Both experiments supported the ideas about the possible role of curiosity in causing the endowment effect. In experiment 1 there were found higher levels of curiosity for owners as compared to non-owners of a chip that could be exchanged for money at the end of the experiment (you could only get to know the exchange rate of the chip if you still owned the chip at the end of the experiment). In addition, there was observed a positive correlation between selling and buying prices. Experiment 2 showed that owners of an exchange good demand less money for their chip when they know that they will learn the exchange value even if they sell, compared to a situation in which they lose the opportunity of knowing the exchange value if they would sell.

These findings suggest that if curiosity can only be satisfied by holding on to the exchange good (if you currently own the good) or buying the exchange good (if you do not own the good), curiosity may also lead to disparities between buying and selling prices.

More general, the researchers think that the curiosity effect may generalize to all goods that have an element of uncertainty associated with them. Examples are intangible goods such as experience goods or services.

So taken together, the present research has further explored some factors that may contribute to the fact that owners generally demand more money in order to give up a possession than non-owners are willing to pay in order to obtain it. It was found that owners tend to be curious with respect to the value of their possessions, when the exact value is not yet known. It was also found that this may result in higher selling prices when possession is the only way by which this ambiguity can be resolved. Although the researchers realize that curiosity is not the sole driver of the behavior of Buyers and Sellers, they do believe that the data in their article add to the understanding of the psychology of the endowment effect.

Important concepts in the article
 

¹The endowment effect: the effect that people generally demand more money as compensation for giving up an object than they are willing to pay in order to obtain the same object (Thaler 1980).

²loss aversion: the generalization that losses are weighted more heavily than gains (Kahneman & Tversky, 1979).

Meeting  4

- Emotions -

In this meeting, there is a focus on the connection between emotions and decision making. As is outlined in meeting 1, emotions are often neglected in the theorizing on the rational consumer. One of the central issues will be the (in)ability to predict our emotions. This is an important topic for economics because it implies that it would be meaningful to distinguish between different types of utility.

16. Consequences of regret aversion in real life: The case of the Dutch postcode lottery. Zeelenberg and Pieters - 2003

Introduction

The expectations are that regret will only have influence for lotteries that are designed in such a way that they have the potency to evoke severe regret (postcode lottery vs. state lottery). Anticipated regret (rather than other emotions) is predicted to account for decision-making effects.

Regret = A negative cognitively based emotion that we experience when realizing or imagining that our present situation would have been better had we acted differently.

Regret theory = We compare our current state with what could have been. We anticipate the experience of regret and take it in to account when making decisions.

Lottery plays: “it could have been you”. Regret is evoked by stating that you haven’t won a large price because you didn’t participate.

The Dutch Postcode lottery: “it would have been you”. Anticipated regret because you would have won if your neighbor did.

State lottery = randomly assigned and unique to participants

Postcode lottery = personalized and shared

This research examines the reasoned action model with and extension of anticipated regret and the feedback structure of the lottery type (moderates the effect of the anticipated regret and affects the mean levels of anticipated regret directly).

Study 1

Regret is the most dominant emotion in the Postcode lottery.

Study 2

Anticipated regret when hearing neighbors won: Postcode lottery > State lottery

However when no feedback is present there is an equal amount of regret.

Study 3

One may argue that the threat of envy and jealousy may produce similar strategies in decision makers because the Postcode lottery feedback is social (conductive to envy and jealousy).

But…

When given feedback (neighbor wins)

Anticipated regret: Postcode lottery > State lottery

Envy and jealousy: Postcode lottery = State lottery

Study 4

Did anticipated regret predict behavioral intention?

Anticipations of post-decisional regret

(over and above subjective norms and attitudes)

influence decisions to play the Postcode lottery,

 but not the State lottery.

Discussion

Anticipated regret predicts behavioral intentions.

The influence of anticipated regret upon decision making is conditional upon the feedback structure of the decision situation, and independent of potential other determinants of decision making in real life such as attitudes and subjective norms.

Regret aversion = regret minimizing choices may promote risky behavior over safer ones

(While people are also risk averse and normally choose safe options (not playing) above risky options (playing))

Regret in action sequence: under certain conditions the motivation to minimize regret may in fact increase the likelihood that it’s experienced in the long run (e.g. when participating in the postcode lottery people want to minimize current and future regrets by sticking to participation, however this might increase the likelihood of future regrets).

Action and inaction effects:

Did not play yet postcode, receiving feedback about neighbors -> action intention

Already played postcode -> continuation of the participation -> inaction

Conclusion

Anticipated regret effect in lottery participation decisions. Moreover, it shows that these effects are dependent on the feedback structure of the lotteries.

17. On the psychology of ‘if only’: Regret and the comparison between factual and counterfactual thinking, van Dijk and Zeelenberg (2004)

Introduction

A central element in regret is the comparability of a decision outcome with the outcomes forgone.

There are factors that could reduce the tendency to compare and thereby attenuate regret. These authors demonstrated such factors, the uncertainty about counterfactual outcomes, and the incomparability of counterfactual outcomes and factual outcomes.

Regret = negative emotion that e experience when we realize that our present situation would have been better, if only we had decided differently.

There are counterfactual thoughts in regret because one has to run a mental simulation of what happened and what could have happened instead, and compare the two.

People will often be certain about factual outcomes, but the outcomes they could have obtained will be surrounded with uncertainty. (salary now vs. salary that could have been)

How does this potential uncertainty about what might have been affect regret?

If we are certain about what we missed out on, these counterfactual outcomes may be of a different kind than the outcomes we actually obtained (similar car for 100 less vs. dissimilar car for 100 less).

How does reduced capability between actual and counterfactual outcomes affect regret?

Expectations: uncertainty about counterfactual outcomes and comparability of counterfactual outcomes and the factual outcome are factors that have a direct impact on regret.

Study 1 (Uncertainty about counterfactual outcomes)

People are found to be reluctant to base their decisions on uncertain information (pass/fail exam -> go to Hawaii vs. not knowing -> don’t go).

Authors here suggest that people may not base their emotions (here: regret) on the consequences of what could have been if what could have been remains uncertain.

Win a stress ball

Certain: otherwise CD of your choosing, walkman or a dinner for two.

Uncertain: don’t know

Feelings of regret: Certain > Uncertain

Does this mean that when we are certain about what could have been -> very susceptible to regret? Study 2 addresses this question.

Study 2 (Incomparability of counterfactual outcomes and factual outcomes)

Not all outcomes are easy to compare (apples vs. oranges). If comparability lies in the heart of regret, the (in)comparability of factual and counterfactual outcomes may be another feature why we do not constantly go about kicking ourselves over forgone outcomes.

What is: liquor token (15) / book token (50) vs. what could have been: book token (50) vs. liquor token (15).

Feelings of anticipated regret: missed outcome same category > missed outcome different category

Study 3 (comparability and need to compare)

Individuals differ in the extent to which they compare outcomes. There are differences in social comparison (people often compare their outcomes to those of others, this can be a counterfactual reference point).

People may be expected to engage in comparisons, even if these turn out to be difficult ones.

Can individual differences in need to compare moderate ease of comparability?

Regret in Low comparison orientation: missed outcome same category > missed outcome different category

Regret in High comparison orientation: missed outcome same category = missed outcome different category

Difficulty to compare may be overcome if the need for comparison is high.

Discussion

Comparison -> vulnerability to regret

Is moderated by

-         Certainty of the counterfactual outcomes

-         Comparability of the outcomes (and susceptibility to compare)

Contrast effects = contrasting current outcome with past negative experience.

This effect diminishes as the comparability (time and context) of the past with present diminishes (e.g. a bad meal in a Chinese restaurant has less effect on our reactions if we enjoy a meal in a French restaurant than if we enjoy it in a Chinese restaurant). Also compatibility and ease of evaluation of the to compare stimuli are found to influence decision making.

Comparisons that are more easy to make receive more weight in decision making.

There may be a functional side: uncertainty and incomparability may function as a protective shield (Can be happy with what we’ve got)

Conclusion

Understanding the psychology of ‘if only’. The consequences of ‘what could have been’ for how we feel may be limited if ‘what could have been’ is of a different kind than ‘what is’.

18. The consequences of doing nothing: Inaction inertia as avoidance of anticipated counterfactual regret, Tykocinski and Pittman (1998)

Introduction

Inaction inertia = occurs when forgoing an attractive action opportunity (initial inaction) decreases the likelihood that subsequent action will be taken in the same domain.

The second action opportunity has in some sense loss worth even though the second action still has positive value. E.g. participants who were asked for the second time whether they would participate in a frequent flyer program didn’t join the second time because they would have collected more points if they had already joint the first time (vs. control and ppn. which would not have collected that much more.)

Upward counterfactuals = thinking about alternative scenarios that would have produced better outcomes.

When inaction inertia occurs it could be because people have regret and unpleasant thoughts about what could have been. People try to avoid unpleasant situations if they can. This research examines the possibility that avoidance of counterfactual regret has a role in inaction inertia.

Study 1

What if the current opportunity is not likely to be effective as an counterfactual regret avoidance tool?

The inaction inertia should be attenuated once is made clear that avoidance of regret isn’t possible.

First action: not choosing to join a fitness close to home (5 vs. 25 minutes awau)

Second action: first is not possible, choose to join a fitness 30 minutes away?

Unavoidable regret was induced by saying that while driving to work you pass the two gyms.

Small difference condition (25 minutes away in first opportunity) vs. Large differnce condition (5 minutes away in first opportunity).

Inaction inertia:

-         Small difference < large difference

-         Regret unavoidable < regret avoidable

Large difference and unavoidable regret less inaction inertia (not in small difference condition)

Continued inaction is less likely once it is no longer instrumental in avoiding the regret-eliciting situation.

Study 2

Not so likely alternative study 1: people could have thought to squeeze in gym in work schedule. The second study addressed this alternative explanation, the gym became renting a apartment close to school (the forgone opportunity is seen every day you walk to school). and found the same results as study 1.

When there is a constant reminder of the missed opportunity the willingness to take the second opportunity increased. However, when it can be avoided inaction increases.

Study 3

At some point, the costs of avoidance may exceed the psychological costs of anticipated regret. In this case, inaction inertia is also expected to decrease.

Shopping at the local mall

Avoidance costs: varying the amount of time left in which to make a desired purchase. Choosing between embracing the costs of action (experiencing regret on a excellent sale price) or the costs of inaction (not having a suit ready on time).

Small difference (10% sale) vs. large difference (50% sale)

Inaction inertia:

-         Small difference < large difference

-         Little time  < much time

Large difference: little time -> more action (not in small difference condition)

Enlarging avoidance costs reduces inaction inertia.

It could be that the avoidance costs outweigh the costs of action, but it could also be that the inaction costs here simply were more noticeable than in other experiments?

Study 4

If inaction inertia indeed represents an attempt to avoid counterfactual regret, the effect should be attenuated if one finds out that the missed action opportunity was not as attractive as thought.

First action: join a tour in Tuscany.

New info: tour guide bad or no new info.

Second action: join more expensive tour in Tuscany (small vs. large difference in price)

Inaction inertia:

-         Small difference < large difference

-         New info about first tour  < no new info about 1st tour

Large difference: new info -> more action (not in small difference condition)

This pattern consists with counterfactual regret in inaction inertia. Giving information about the unattractiveness about the missed opportunity reduces inaction inertia.

The authors also looked at the reasons that led the ppn. to their decisions.

Regret:

Findings are not that strong! but indeed, highest regret in large difference and no info condition.

Price:

Large difference: new info -> less affected by price (not in small difference condition)

Large difference/ no new info -> highest affected by price scores

Idea of a tour:

Small difference > large difference (enthusiasm)

Regret is only felt when no new information is given in the large difference situation and these participants are also most affected by price. New info reduces regret and being affected by price.

Discussion

Escaping vs. avoiding regret: is inaction inertia driven by “this makes me feel like a sucker” (avoiding) or “how stupid was I for not acting sooner” (escaping)?

Differences: there are differences in the extent to which people can successfully avoid. People also vary in their tendency to ruminate and come up with counterfactual scenarios.

19. Looking forward to looking backward: The misprediction of regret. Gilbert, Morewedge, Risen and Wilson (2004)

Introduction

Self-blame is a critical element of regret and makes regret different from disappointment. People expect a narrow margin of loss- or a “near miss” –to exacerbate self-blame, and with that regret. But people do not realize how readily they will rationalize negative outcomes once they occur.

Research suggests that people may be remarkably good at avoiding self-blame (and regret), better than they realize.

Hypotheses

-         Ppn. would expect the margin of loss to influence their experiences of regret but not their experiences of disappointment. The authors hypothesize that the margin of loss would not influence their actual experience of emotion.

-         The authors hypothesized that ppn would expect the margin of loss to influence their feelings of self-blame, but that, in fact, it would not.

Study 1

Wide margin: wrong answer vs. narrow margin: almost right answer

-         Overestimation of how much regret they would feel in the narrow margin, but no difference in regret on experience.

-         Overestimation of disappointment in narrow and wide margin. The size of margin did not influence disappointment.

The participants expected the narrow margin to influence their feelings of regret but not disappointment. In fact, the margin of loss influenced neither emotion. Ppn. in the narrow margin condition did not experience the self-blame they anticipated.

Study 2

Replicated the results of study 1 in a real life situation, regret in missing the train by far or just missing the train.

Study 3

This study sought direct evidence to suggest that forecasters of emotions were underestimating their ability to avoid self-blame.

-         Forecasters predicted more regret by just missing the train.

-         Forecasters expected to blame their selves by just missing the train, people who really experienced just missing the train tended to blame someone or something else.

-         Size of the margin influenced the forecasted responsibility bit not the experienced responsibility

Forecasters predicted more regret, self blame and responsibility in the narrow margin condition, while not experiencing these emotional impacts.

Discussion

The emotional impact of margins of loss is not as powerful as people anticipate and people are less likely to blame themselves.

People pay a steep price (overpay consumer goods, negotiate ineffectively and overvalue the ability to change their minds) to avoid future regrets, and this study suggests that they may be purchasing emotional insurance that they don’t really need.

20. Affective forecasting - Knowing what to want. Wilson and Gilbert (2005)

Introduction

Affective forecasting = people base many decisions on predictions about their emotional reactions to future events.

Generally people can predict whether events are likely to be pleasant or unpleasant. People are less adapt to predicting the intensity and duration of their future emotional reactions.

Underestimation: being in a ‘cold’ emotional state and predicting ‘hot’ emotional state (e.g. having just used drugs and predicting the craving for it in the future). More common is the overestimation, the impact bias.

Impact bias

Impact bias = overestimating the intensity and duration of emotional reactions to future events.

There are two mechanisms causing the impact bias:

-         Focalism = the tendency to underestimate the extent to which other events will influence our thoughts and feelings.

-         Failure to anticipate = how quickly people will make sense of things that happen to them in a way that speeds emotional recovery.

Sense making and people’s ignorance of it

Events trigger four processes:

-         Attention: especially when events are self-relevant but poorly understood

-         Reaction: emotional reaction to these events

-         Explanation: attempt to explain or make sense of these events

-         Adaptation: while making sense, people adapt emotionally to events.

People have little trouble imagining themselves feeling overjoyed (when getting an A) but have a lot of trouble imagining themselves explaining the event in a way that makes it seem ordinary and  predictable (having explained grade -> thinking about achievement less and experiencing less joy when thinking about it)

People do not realize how quickly they will make sense of unexpected positive events and how doing so will make their positive emotions dissipate.

Independent of favorability of the explanation, sense making hastens emotional recovery from events.

Pleasure paradox: when a dollar is attached to a note people will be more happy when they can’t make sense of why they received a dollar (uncertain). However people think they would be more happy when they can make sense of the note (certain).

Negative events: motivated sense making

Sense making involves coping, psychological defenses and rationalization. A feature that all these defenses have in common is that they are largely unconscious, and in fact are more effective by operating behind mental scenes.

Immune neglect = because people are generally unaware of the operation of defenses, they tend not to take them into account when predicting future emotional reactions.

Consequences of immune neglect:

-         Failing to recognize that people have produced their own happiness with defensive processes (e.g. being transferred to an undesirable location and being happy), they might attribute their good fortune to the guiding hand of an external agent (e.g. god).

-         People are often happier with irrevocable choices (e.g. having bought something that you cannot return but being happy because of rationalization). However people prefer stores with a liberal returning policy.

-         People are more strongly motivated to make sense of major trauma’s than minor (e.g. insulted by a stranger is sometimes worse than a friend because you can rationalize this more often).

-         Loss aversion: predicting more unhappy with loss. In fact, the magnitude of unhappiness by losing was no greater than the magnitude of happiness by winning.

Summary and future directions

Impact bias could be positive: work harder to obtain something and avoid things that could have negative consequences.

Impact bias could be negative: unnecessary dread and anxiety about the future. Choosing less-than-optimal treatment (thinking a treatment will give worse emotions than in reality). Choosing a radical make-over (because thinking outcome will give very positive emotions)

21. Anomalies: Utility maximization and experienced utility. Kahneman and Thaler (2006)

Introduction

Anomaly = if it’s difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm.

Economics: utility maximization -> The authors think this is false.

-         Decision utility = “wantability”: it is inferred from choices and used to explain choices.

-         Experienced utility = hedonic experience associated with an outcome.

The authors return to the old question of whether preferences optimize the experience of outcomes.

People do not always know what they will like; they often make systematic errors in predicting their future experience of outcomes and, as a result, fail to maximize their experienced utility.

People make hedonic forecasts of utility with direct measures of experienced utility. Hedonic forecasts or choices are influenced by factors that are clearly irrelevant. In many cases, people will use the highly accessible response to a question that was not asked.

An individual who makes a decision at time t0 (e.g. having had a spoon of yoghurt) about time t1 (e.g. liking the whole cup) will be influenced by the context and mental state of time t0 (affect of the first swallow).

Many people fail to anticipate that the indigestion of a substantial amount of a disliked substance is distinctly worse than a single swallow.

In this column four areas in which errors of hedonic forecasting and choice have been documented are discussed.

1)      Where the emotional or motivational state of the agent is very different at t0 than t1.

2)      Where the nature of the decision focuses on aspects of the outcome that will not be salient when it is actually experienced.

3)      When choices are made on the basis of flawed evaluations of past experiences.

4)      When people forecast their future adjustment to new life circumstances.

1) Effects of current emotional state

Projection bias = projecting current mental state onto a future one.

In particular, hot - cold empathy gap (summary Wilson & Gilbert, 2005).  Hungry shopper will purchase more, food is more attractive in hot state than in cold state.

Projection bias implies a violation of utility maximalization. Some virtuous choices that people make may involve a lack of empathy for the future self who will have to live with the choice.

2) Effects of the context of choice

Differences in the state of the individual when being at time t0 and time t1.

Ranking of two goods may be different when evaluated next to each other than separately

Salience of attributes:

e.g.: two speakers in store beautiful/good sound vs. ugly somewhat better sound. Paying to much attention to the small difference in sound quality (not noticed separately) and too little attention to appearance (noticed separately).

Salience of variety:

Simultaneous choose snacks for each day -> each day different.

Sequential choose snacks -> each day the same. (higher experienced utility)

Diversification bias = excess variety seeking in simultaneous choice.

3) Learning from the past

Duration neglect = retrospective evaluations of episodes were radically insensitive to variations of duration.

Peak/end rule = simple average of the quality of the experience at its most extreme moment and at its end predicted retrospective evaluations with substantial accuracy.

This rule violates rational evaluation. Temporal monoticity (painful episode does not improve overall utility) is overruled by this rule, extending the painful period can improve remembered utility if new end is less aversive. E.g. adding a period of reduced loudness to an unpleasant noise is less aversive in memory and more likely to be chosen.

4) Mispredicting adaptation

Affective forecasting = predict the hedonic effect of a long-term change in life circumstances.

People exaggerate the importance of any aspect of life when one focuses attention on it. The task of evaluating the impact of a change in life circumstances inevitably draws attention to distinctive aspects of the change. E.g. students in east and Midwest said that they would be happier in California (climate is nicer), but students on both locations were found to be equally happy.

People often adapt surprisingly well to adaptations in their lives. Withdrawal of attention is the main mechanism of adaptation to life changes, intuitive affective forecasts will miss this process of attentional adaptation, unless they are corrected by specific personal knowledge.

People are systematically wrong in their expectations about the life circumstances that will increase or decrease their happiness, which in turn implies that life choices that people make in their pursuit of happiness are also likely to be wrong.

Commentary

Sometimes guiding can help:

Libertarian paternalization = setting default options in such a way as to help people avoid the most common errors of utility maximization.

Meeting 5

22. The norm of self-interest. Miller (1999)

The average person is a self-interest theorist

People who would benefit materially from the implementation of a social policy are expected to have more favourable attitudes toward that policy than are people who would not (financial compensation à more willing to participate)

Instruction through education (scientific theories) and experience leads to the belief that people are self- interest. Why? Scientific theories provides answers to fundamental questions about the nature of the human condition (Science creates concepts, ways of understanding the world). In short, self-interest motivation can indeed be taught.

Source of human action:

Descriptive theories à what does motivate people?

Prescriptive theories à what should motivate people?

The responses to two ethical dilemmas of students were assessed at the beginning and end of the semester.

“Would you return a lost envelope with $100 in it?”

“Would you report a billing error that benefited you?”

Participants were divided in 3 conditions: two different microeconomics classes and an astronomy class.

Findings: taking a course in microeconomics altered the students' conceptions of the appropriateness of acting in a self-interested manner, not merely their definition of self-interest. For example, not reporting a favorable billing error, in addition to being self-interested, is also the rational and appropriate course of action.

Pointing out to people where their material self-interest lies make it salient to them and endorses the social norm of being self- interest. When people are asked to reflect on the link between their self-interest and their choice à it is more likely that people make a self- interest choice. President Regan example: By telling voters that a vote for him would be good for their wallet, Reagan was telling them that it was normative OK to vote on the basis of self interest (a vote for Reagan is good for your personal financial condition).

Social norms:

• Shared perceptions of appropriate behavior.

• Norms have the power to persuade people to act publicly in ways that are different from their private inclinations.

• The norm of self-interest: It induces people to act publicly in ways that maximize their material interests, whether or not they are so inclined privately.

• Descriptive: people are self-interested.

• Prescriptive: people ought to be self-interested.

  • Result of such a social norm: people act more in line with self-interest than he or she might personally be inclined to do.

Descriptive Power (calculation of the material consequences of deviating from a self-interested course of action):

• The expectation that others will act in a particular way frequently leads people to act similarly.

Two reasons why the expectation of self-interested behaviour from others could lead people to act in a self- interested manner (contrary to their private preferences):

1. People fear to do otherwise because it could lead to their exploitation (you: cooperate à the other acts in self-interest. You lose more than the other (example: prisoner’s dilemma).

2. People fear to do otherwise than the social norm because it would be a waste of time and effort. When people have no personal stake and assume that their position is not shared by others (they think they are the only ones who feel this way). They tent to conform to the social norm.

Prescriptive Power (calculation of the social consequences of deviating from a self-interested course of action):

• Decisions made by groups tend to be more self-interested than those reached by individuals (more competitive in groups à conform to the norm of self- interest).

There is a greater impact of self-interest on behaviour than on attitudes. There is a significantly stronger relation between material self-interest and social action than between material self-interest and social attitudes. How interpreted: People only convert a supportive attitude into a supportive action when they have a personal stake. The prospect of behavioural involvement (having a personal stake), unlike the request for an opinion, forces people to consider cost and hence prompts self-interest reflection.

What to make of evidence suggesting that material self-interest is a powerful force in people’s lives? The ideology of self-interest, widely celebrated in individualistic cultures, functions as a powerful self-fulfilling force.

In two ways:

1.       Individualistic cultures structure their social institutions which led people to belief that.

2.       Individualistic cultures emphasize the social norms that induce people to follow their material self-interest rather than their own principles.

Stated more boldly, people act and sound as if they are strongly motivated by their material self-interest, because scientific theories and collective representations convince them that it is natural and normal to do so. “People treat self-interest as a natural law and because they believe they should not violate a natural law, they try to obey it”.

Evidence that material self-interest is powerful, therefore, may speak more to the power of social norms than to the power of innate proclivities.

Self-interest is inevitable and universal rather than historically and culturally contingent only serves to strengthen the layperson's belief that pursuing self-interest is normatively appropriate, rational, and enlightened.

Positive feedback loop: The more powerful the norm of self- interest, the more evidence there is for the theory of self-interest, which, in turn, increases the power of the self-interest norm

23. Evidence for an equality heuristic in social decision making. Messick & Schell (1992)

Subjects were asked to divided the gross income of a company in an accounting sheet in:

·         Expenses column

·         Profit column

Three factors were manipulated. Subject were asked:

1.      To divided either the expenses or the profits. (Target of the allocation task)

2.      The causal attributions for the differences in gross incomes (internal, external, or both)

3.      Whether the subjects were asked to fill in both columns (expenses and profits) or just one.

Target of this research: how do the subject divide the expenses of profits? Equal?

Although allocations must be fair, there is no algorithm (natural law) for determining what a fair allocation is. Equality? Equity? Allocation tasks in which fairness is important, the concept of equal division is used as a salient decision heuristic:

·         Equal division = Simple. It’s understood by everyone and quickly implemented (cognitively simple strategy).

·         Defensible. It does not differentiate among the recipients. A short-cut used without regard to other questions of deservingness or the goals of an allocation.

·         Effective solution when: The unhappiness of people who get less than an equal share exceeds the happiness of those who get more.

·         Situation = ambiguous or complicated? Resource allocations becomes more equal. 

·         People allocate more equally to maintain intergroup relations and improve morale. 

·         When allocating negatives, people tend to make more equal allocations than when they allocate positives.

Subjects heuristically used equality to make their allocations à Over 70% of the subjects allocated at least one column equally (expenses or profit column).

The frequency of equality varied as a function of:

·         Target of the allocation (expense or profit)

·         Attribution given (internal, external, or both). The use of equality is sensitive to the attribution given for the performance differences:

o       External factors produced the most equal allocations of profits (with unequal expenses) Example: the number of people showing up at the market.

o       Internal attribution produced the highest proportion of equal expense allocations (with unequal profits). Example: individual ability and salesmanship.

Subjects used the equality rule more when:

·         Expenses were distributed rather than profits:

o       Allocating expenses, 71% of the subjects allocated expenses equally.

o       Allocating profits, 69% of the profits were allocated equally.

§       The tendency to divide expenses more equally than profits, might be related to previous findings of loss aversion.(Prospect theory: Losses are considered more pain full)

·         External attributions account for the income differences rather than internal attributions. This may reflect an association of equality with external causation of differences.

·         Equal division of profits resulted more when associated with external attributions (than from internal attributions or both) à An external attribution for the performance differences increased the frequency of equal allocations.

·         Subjects allocating both dimensions displayed an effect that was not statistically different from that shown by subjects who were asked to allocate only one.

The use of equality did not imply agreement about how the gross income should be divided amongst the partners. The pattern rather suggests that some features of the situation have a stronger tendency than others to evoke equality as the allocation

Even though these latter subjects were only asked to allocate one of the dimensions, either expenses or profits, most of them filled out the entire table, revealing that they understood the consequences of their choices. à When the equality heuristic is used, it is not used in ignorance of its consequences.

Is the tendency to divide the target equally is not a simple experimental demand. Because the instructions ask the subjects: divide the target ‘in a fair and reasonable way’. Equal is one, but not the only ‘fair and reasonable’ way to allocate the outcomes.

Unexpected finding:  Subjects who were given both external and internal attributions for the income differences, tended to make allocations, that were like the subjects who got only the internal attributions. This outcome suggest that the internal attributions might be a default option in these situations.

Extra piece to make the above more clear:

In conclusion: a possible implication of these findings for understanding interpersonal or intergroup conflict. Two different people, focused on the different target dimensions in this study, expenses versus profits, would be likely to support different solutions for the allocation problem. One person might believe that the expenses

should be divided equally, while another contends that it should be the profits that are the target of equal division. These are incompatible proposals. However, the idea that simple rules can be used to fashion complex strategies, the very idea of equality can be used to solve this interpersonal conflict. One can propose that the final allocation be an equal mixture of the two solutions: that each partner’s share of the expenses and profits simply be an equal contribution, a simple average, of the two different solutions. In this way, the final allocations would involve unequal divisions of both expenses and profits, but the distributions themselves would have been created by three applications of the equality heuristic: equal expenses, equal profits, and an equal mixture of the first two.

24. If it walks like fairness, and quacks like fairness, it sometimes is fairness: Instrumental and true fairness in bargaining. Van Dijk, Leliveld, & Van Beest (2009)

Whereas economic theory is essentially built on the assumption of self-interest, social psychology has paid great attention to the importance of fairness.

Distinguish between instrumental fairness and true fairness:

-         Instrumental fairness: bargainers use fairness to maximize their own outcomes. They appear fair.

-         True fairness: a concern for the outcomes of one’s opponent. Immune to manipulations of information and power

4 moderators:

-         the social value orientations of the bargainers

-         the emotions bargainers communicate

-         the valence of the bargaining outcomes

-         the initial distribution of property.

Mixedmotive situation: parties have their own interests but realize that they need the cooperation of their opponent to secure these interests. 2 motivations: Self-interest and fairness.

Ultimatum bargaining game: allocator proposes a ‘take it or leave it’ offer à If the recipient accepts, the money is distributed in agreement with the allocator's offer. If the recipient rejects,both players get nothing.

Self-interested bargainers à always maximize outcomes: allocator offers 1 cent to the recipient and that the recipient accepts this low offer. Better than nothing!

Fair bargainers: equal division

Offers are not always truly fair à Equal offers can have a strategic underpinning à fear that low offers will be rejected.

For example: Sometimes a recipient is not able to recognize an offer as an unfair offer, because she is not fully informed à chips are worth twice as much to the allocator than to the recipient.

2 conditions:

1. Recipient knows (symmetric information)

2. Recipient doesn’t know (asymmetric information).

Result: Conditions strongly affected the offers:

• In the symmetric information condition allocators compensated for the differential value (still a equal split).

• In the asymmetric condition the allocator did not compensate à a seemingly fair split à strategically use fairness à sophisticated maximizers.

Delta game: modified version of the ultimatum game.

• The offer is multiplied by the factor delta (0δ1).

• δ=0à delta game = ultimatum game.

• δ = 1 à delta game = dictator game.

• Delta increases: power recipient diminishes. Low delta à higher offers due to rejection fear (and vice versa).

Lambda game: consequences of rejection are unequal.

• Allocator’s share: multiplied by λ (with 0 λ  1)

• Recipient’s share is multiplied by (1 – λ).

• Low λ: consequences of rejection: high for allocators and low for recipients.

• When consequences of rejection for the allocator are reduced offers go down.

Use of instrumental versus true fairness dependents on:

1. The social value orientations of the bargainers (Personality).

Prosocials à true fairness (unaffected by the manipulations of information and power) Proselfs à Instrumental fairness (lowered the offer when the consequences of rejection were low)

2. The emotions bargainers communicate (Emotions). Emotions strongly affectes bargaining behaviour.

In asymmetrical information conditions allocators predominantly:

• deceived the angry recipient (did not compensate the offer à instrumental)

• correctly informed the happy recipient (did compensate the offer à true fairness) about the differential value of the chips.

Possible reason: Anger, being a negative emotion, may communicate the possibility of rejecting an offer. Happy = positive.

3. The valence of the bargaining outcomes (Valence). Will people become more or less fair when they have to bargain over negative outcomes than when bargaining over positive outcomes? YES! Consequences low or high, participants predominantly split a loss equally (true fairness).

Reason: A loss can be considered to be more harmful than withholding a gain à reason why bargainers in the negative valence ultimatum game are so reluctant to favour themselves over the recipient.

4. The initial distribution of property (Property Rights). Nothing is said about the ownership of the property before the negotiation starts. Allocators are reluctant to breach initial property rights when the property was initially assigned to the recipient  

Fairness can have its strategic underpinnings, but on many occasions, people show a genuine concern for fairness, even in competitive settings like bargaining.

25. Less power or powerless? Egocentric empathy gaps and the irony of having little versus no power in social decision making. Handgraaf, Van Dijk, Vermunt, et al. (2008)

Powerful people are more generous to completely powerless counterparts than to weaker counterparts. People however, generally expect them to be less generous to powerless counterparts as opposed to weak counterparts. Consequently, people prefer having a little bit of power to having no power whatsoever.

Delta game: The continuum between the ultimatum game (in which the recipient has substantive power) and dictator game (in which the recipient has no power at all).

Comparing offers and rejection ratios under various levels of delta. This revealed that an increase in relative power for the allocator (i.e., lower delta) produced lower offers. Except when recipients became completely powerless à Ironically, allocators give higher offers to completely powerless recipients than to recipients with a small amount of power.

The basic human tendency to search for and increase power (“liever iets dan niets” “rather something than nothing”) has an ironic consequence. It produces lower rather than higher outcomes.

The Powerful: Power can also produce socially responsible and benevolent behaviour.

Even though powerful people tend to behave as sophisticated outcome maximizers, power can also induces feelings of social responsibility. à When power holders face powerless counterparts (people who have no means whatsoever to strike back) strategic considerations become less important. In these circumstances power holders behave in more benevolent (gracious) and more pro-social ways toward those who in need. Allocators are more prosocially oriented toward powerless recipients because they frame the situation different. “What kind of situation is this?” “What kind of person am I?” and “What does a person such as I do in a situation like this?”. These questions have completely different answers when one is confronted with a powerless other than when this other has some power to retaliate. Allocators confronted with a powerless person, experience the situation as one that asks for social responsibility (opponent is defenceless). Whereas those confronted with retaliatory power act as sophisticated profit maximizers (opponent is still a threat).

In their study, they showed that allocators who have an informational advantage make less use of this advantage when the recipient is powerless and cannot retaliate on an unfair offer. Only toward completely powerless recipients that allocators behave more fairly. Allocators are more concerned for the welfare of a completely powerless recipient than for the welfare of a recipient with very limited power.

It is useful to distinguish between situations: Even the smallest decrease in power, meaning one of the parties becomes completely dependent on another, may have strong effects on the way the situation is interpreted by the relevant agents, especially by the stronger party. Increasing or decreasing power is usually interpreted as a continuous phenomenon with continuous effects à a gradual decrease in power for the recipient gradually decreased offers. However, when the gradual decrease of power reaches the point of complete powerlessness, a discontinuity seems to occur, which radically changes the way a situation is framed.

Power holders behave more strategically and exploitatively when they conceive themselves and others as separate individuals. However, when they conceive themselves and others as part of a social entity, they use their power in a socially responsible, more benevolent way.

The Powerless:

CAUSE: Egocentric empathy gap. Recipients or low power holders fail to correctly select the frame that will bring them the higher payoffs. They don’t putt themselves in their counterpart's shoes (egocentric empathy gaps). As a result the recipients fail to understand that being powerless may actually be more advantageous (or less disadvantageous) than having a little bit of power. Frame interference causes them to be unable to predict the frame their opponent will be in: Recipients expected allocators to make use of their power advantage also when this power advantage is absolute. They do not expect that the allocators will frame the situation as one that requires socially responsible behavior. They fail to understand that sometimes it pays to be powerless.” Egocentric empathy gap = measured by the endowment effect.

An egocentric empathy gaps stem partly from people's misprediction of what they would experience if they were in the other role. Even when participants experience both roles (high power/low power), they make paradoxical offers and reveal counterproductive preferences à People do not make the connection between their own preferences with regard to power distributions and their own behavior as allocator à The same people that want to get out of the powerless situation and expect to receive more when they have more power, paradoxically allocate more to powerless others.

Cause: participants who actually experience both frames (high power/low power) are so preoccupied with the frame, that is produced by their current situation, that this overrides the reasoning they expressed when they were experiencing the framing of the alternative situation.

It is often thought that those in power will abuse their power. Participants in our studies anticipated such behaviour and preferred more power over less. This reasoning was not always correct. Those who were confronted with completely powerless others were prosocially motivated, interpreted a situation as a decision that calls for social responsibility, and therefore considered it inappropriate to (ab)use their power.

“Power corrupts, and absolute power corrupts absolutely” (Lord Acton) is at best only valid for the first part: Powerful allocators will indeed take as much as they can, acting as sophisticated profit maximizers. The exceptions, however, are those with absolute power, as they show an inclination to care for powerless people's outcomes and distribute resources in a socially responsible manner.

26. Tacit coordination in social dilemmas: The importance of having a common understanding. Van Dijk, de Kwaadsteniet, De Cremer (2009)

Resource dilemma: Fish in a pond à Take to much

Public good dilemma: Taxfraud à Not contributing.

Tacit coordination à Group members tacitly coordinate their actions by predicting others' behaviors and adjusting their own behavior accordingly to meet the perceived demands of their collective task.

For tacit coordination to work, it is essential that people “read the same message in the common situation, to identify the one course of action”. When facing a situation, people should be convinced that they (and the other persons) have a common understanding about the decisions they face. Rules that are related to fairness (the equal division rule) may provide the common ground that is needed for a common understanding on which decisions are based.

Equal division rule: equal division of the prescribed level 50/50. The equal division rule is used for tacit coordination because the rule is easy to implement and consistent with general preferences of fairness. The equal division rule can be highly efficient in tacit coordination.

Common understanding is key of tacit coordination. It implies that people will only adhere to the equal division rule if they feel that there is a common understanding to do so and that others will thus act alike. Otherwise it would me pointless à the use of the equal division rule in a public good dilemma is gone if you don’t expect that others groupsmember are equally determined to contribute their (equal) share. When a common understanding is lacking, the equal division rule may not fill the vacuum of indetermination.

NOTE: Common understanding does not imply that people should strive for the same goals; they should primarily agree on what decision they should make.

What happens when a feeling of a common understanding is present (strong situation) and absent (weak situation)?

When a common understanding is absent, people will be less likely to rely on the equal division rule and more likely to base their decisions on relevant traits and dispositions à Social value orientations. Social value orientations are individual differences how people evaluate outcomes for themselves and others (prosocials and proselfs (individualist + competitors)

2 conditions/situations:

1. Strong situation: provide salient (clear) cues to guide behaviour. Easy to provide a common understanding. Prosocials and proselfs adopt the equal division rule to attest the situation; the impact of personality differences may be limited.

2. Weak situation: don’t provide salient (not clear) cues to guide behaviour. Hard to reach a common understanding, conditions for tacit coordination are not met. People are less likely to use the equal division rule and more likely to rely on their social value orientations. Consequence: compared with proselfs, prosocials “take less” in resource dilemmas and contribute more in public good dilemmas.

The current insights may also contribute to the understanding of why there is not always a correspondence between social value orientation and (cooperative) behaviour à Result in strong situation: Proself offers an equal split.

The concept of common understanding is probably most comparable with the concept of shared mental models and socially shared cognition = two souls, one thought. Socially shared cognition à the realization that others share similar task representations facilitates group communication, therefore a common understanding enhance efficiency by facilitating tacit coordination.

Tacit coordination process is not dependent on what causes the common understanding: Any factor that increases the feeling of having a common understanding may promote tacit coordination, and any factor that reduces that feeling may be expected to hinder tacit coordination.

The effects of environmental uncertainty in resource dilemmas: Environmental uncertainty in resource dilemmas refers to the uncertainty regarding the characteristics of the resource (manipulated environmental uncertainty). Both studies showed that harvests were more strongly affected by social value orientations under high uncertainty than under low uncertainty è weak vs. strong distinction à Resource dilemmas with environmental certainty provide strong situations in which social value orientations only play a minor role. However, environmental certainty may not always provide a strong situation. Even if group members have all information available to apply the equal division rule, a situation of environmental certainty may be characterized as a weak situation if. 3 factors can reduce the perception of having a common understanding (i.e., , , and behavioral variance).

1.       Failure feedback, feedback indicates collective failure à Although they shared the same task information, collective failure would lead participants to conclude that apparently the group members did not all draw the same conclusion from this shared information; otherwise, the group would not have failed. In terms of shared mental models, this would mean that collective failure led group members to conclude that apparently they did not all construct the same mental model.

2.       Unique information, people feel that they are the only one facing environmental certainty. Not a common understanding.

3.       Behavioral variance, people expect decisions to vary despite environmental certainty. People show high variance in their decisions

Sometimes coordination can be easily promoted by simply pointing out to people that certain information is available to all people involved.

A common identity has been found to enhance cooperation in social dilemmas

A common understanding is a prerequisite for successful tacit coordination. When the situation loses its coordinating potential, social value orientations gain in importance.