Behavioral economics and decision making

This week’s assignment is to comment on your group members’ answers for Assignment #1 and write a reflection on the materials for this week’s class.  

Comment:  Enjoyed reading the responses from the other group members.  In some cases, I was struck at how some answers were quite similar to mine, though much more eloquent (e.g., Chris, #3).  On Yemesi’s #2, I particularly enjoyed her McDonald’s story—as mentioned, the Happy Meal certainly doesn’t appear a rational choice to an adult; this said, the simplicity of satisfying several screaming little tikes with one easy order may not be so irrational after all.  Finally, kudos to Ann (#1) who commented, “I cannot remember making decisions about who to love using any rational means whatsoever.” Priceless, but also raises the question of whether there are circumstances in which we humans throw analysis to the wind and rely predominantly on instinct.

 Reflection:  I found the concept of the endowment effect –that people often demand much more to give up an object than they would be willing to pay to acquire it—fascinating.  Looking for  additional readings I came across The Endowment Effect, Loss Aversion, and Status Quo Bias by Kahneman, Knetsch, and Thaler (http://darkwing.uoregon.edu/~harbaugh/Readings/UGBE/KKT%20Endow%20JEP.pdf) which patiently explains the endowment effect and related concepts.  Reading the narrative, I found one statement that drove the concept home: “…the main effect of endowment is not to enhance the appeal of the good one owns, only the pain of giving it up.  Eureka!…endowment and its effects become perfectly clear:  why home sellers refuse to reduce their asking price in a market meltdown; why politicians become enamored with draft legislation even when it’s shown to be faulty; why I found it so hard to give up my HS girlfriend to a rival even though she and I  had agreed to part ways.  I recommend the paper…it provides a great explanation to a very cool concept. 

 What struck you about the Dan Ariely talk?  What was surprising?  What wasn’t surprising?  Have you noticed any of these effects in your own life? For example, have you ever been overwhelmed by the amount of choices presented to you?

 What struck me the most about the Ariely talk were the numerous examples of behavior that, after his explanation, seemed so intuitively obvious, yet until now went unnoticed (by me). What was surprising was how common the behaviors were in day-to-day life.

 Two aspects of his talk hit home immediately.  First, the idea that too many possibilities can cause consternation with buyers is something I’d been railing about to my consulting clients for years, but had no scientific evidence to support my position.  (Though, honestly, I never looked.)  Several clients had what I believed to be overly broad product lines, though my clients’ position was that their customers needed this myriad of choices.   I argued (to no avail) that they were providing too many choices, and that rationalizing offerings to a basic and premium product, for example, might facilitate customer decision-making.  Having never gotten a client to relent, I don’t know if my approach would have shown results, but I’m at least comforted that there’ was a reason for my intuition.

 Second, as a developer of online teaching and learning systems, our customers (instructors) have always asked for ways to counter cheating during online assessments, which they perceive as more prevalent than during classroom assessments.  (A fact shown to be false, but I digress.)  After listening to Ariely talk about cheating, it dawned on me that adding a simple checkbox together with the statement “I will not cheat” (grossly paraphrased, but you get the idea) prior to opening the online assessment may be an effective deterrent.  The cost to add such a feature is minimal, so it’s certainly worth the effort and I plan to propose it for our next product release.