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Toward a Positive Theory of Consumer Choice

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Abstract

The economic theory of the consumer is a combination of positive and normative theories. Since it is based on a rational maximizing model it describes how consumers should choose, but it is alleged to also describe how they do choose. This paper argues that in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory. In these situations economic theory will make systematic errors in predicting behavior. Kanneman and Tversey's prospect theory is proposed as the basis for an alternative descriptive theory. Topics discussed are: undeweighting of opportunity costs, failure to ignore sunk costs, scarch behavior choosing not to choose and regret, and precommitment and self-control.

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... In this research framework, Mental Accounting Theory (MAT) [24] is integrated with Network Externalities Theory (NE) [25,26], as well as Commitment-Trust Theory (CTT) [27]. Thaler [109,110] indicated that the adoption decision is represented by a value function. ...
... This study contributes to the body of knowledge regarding digital-only banks by developing a model that incorporates several leading behavioral, economic, and cognitive theories, such as Mental Accounting Theory (MAT) [24]; Network Externalities Theory (NE) [25,26]; and The Commitment-Trust Theory (CTT) [27]. Based on the model of this research, it becomes easier to understand the motivations and challenges of adopting digital-only banks since it captures positive and negative factors, as well as social and selfdetermination factors. ...
... However, this model only considers the benefits of using a specific technology; in TAM, the loss and resistance factors are not taken into consideration, nor can a gain-loss analysis be conducted. With the previously mentioned limitations, this research closes the gaps by developing a model drawn from Mental Accounting Theory (MAT) [24,109,110], which is more suitable for explaining the dual role of technology users and service consumers, and it allows for a gain-loss analysis [40,111,179]. In addition, introducing Network Externality (NE) into the MAT model extends our limited knowledge regarding NE influence on intentional adoption in a digital-only bank context [15]. ...
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Digital-only banks have not achieved adoption expectations despite being one of the latest innovations in fintech. Several digital-only banks in the United States and Japan have gone bankrupt, and others continue to operate at a loss. Therefore, it is imperative to conduct this study in Malaysia to understand customers’ behavior, particularly regarding the adoption of digital only banks. With climate change, environmental-friendly behavior, which has been ignored in digital-only bank literature, is becoming increasingly pertinent. This study addresses the lack of an integrated model that investigates the effect of external factors (i.e., critical mass, number of services, and environmental concerns), customer self-determination factors (i.e., trust), and mental perceptions of technology adoption (i.e., convenience, economic efficiency, functional and security risks, as well as perceived value) on the intention to adopt digital-only banks. Data were collected through an online survey targeting Klang Valley residents in the prime age range of 25–54 years old using stratified random sampling. The data was analyzed using structural equation modeling by performing confirmatory factor analysis (CFA) and SEM path analysis in AMOS.v26 software. The results show that convenience, economic efficiency, number of services, trust, perceived value, and environmental concern all have positive significant relationships with the intention to adopt digital-only banks. Further, environmental concern is the strongest indicator of behavioral intention. In contrast, functional and security risks have a negative but non-significant relationship with the intention to adopt digital-only banks. Finally, critical mass has a positive but non-significant effect on the behavioral intention. This study is among the first to examine the influence of environmental concern on behavioral intentions in a digital-only banking context. It also contributes to an expanding body of research investigating environmental sustainability by presenting empirical results in the context of digital-only banks.
... However, anecdotal as well as empirical evidence has established that in reality, people do not follow this normative principle in their individual and business decision-making and thus fall victim to the sunk-cost fallacy- pp. 83-105 Vol. 4 No. 2 (2022) Management & Economics Research Journal 85 mistaken reasoning that sunk costs should be considered in the current decision (e.g., Thaler, 1980;Arkes and Blummer, 1985;Olivola, 2018). The sunk-cost fallacy is a ubiquitous and costly mental error that people are inclined to make when making decisions. ...
... It is a reasoning pitfall that can dissuade one from choosing optimum when it is an option and can lead to poor and suboptimal decisions, such as  Escalating financial commitment to a failed project just because a huge amount of financial resources has been expended on the project;  Sitting through an uninteresting movie just because the price paid was very expensive (Arkes & Blumer, 1985;Strough et al., 2008);  Letting unworn clothes fill up your closet or wearing an uncomfortable piece of clothing just because they were expensive (Zeng, et al., 2013);  Keeping an underperforming employee just because you have already spent so much on him or her (Bazerman et al., 1982);  Staying too long at a terrible job, or a faltering career, just because you have spent years in training to get this job (Staw & Ross, 1989;Arkes and Blumer, 1985);  Refusing to drop out of a hopeless political campaign;  Waiting more minutes for a bus to come after a long wait (Falchetta, 2015);  Finishing an expensive meal you paid for when you are already full, eating an expensive but disliked food;  Filling your home with objects you no longer use; and  Continuing gambling, after losing, to recover losses (Maréchal, 2010); and  Continuing an unhappy relationship or a troubled marriage (Arkes and Blumer, 1985;Staw & Ross, 1989). All these diverse situations are characterized by sunk-cost effectsthe influence on decision-makers to continue a failed or an unpleasant activity just because of the resources already expended on it (Thaler, 1980;Arkes & Blumer, 1985). The last situation above illustrates the fact that the longer you have been together with your spouse, the harder it is to break up because of the time, money and effort already expended on the relationship. ...
... As portrayed in the sunk-cost scenarios itemized above, sunk-cost fallacy features in both business (investment) decisions and personal (consumption) decisions and thus has two respective effects: (1) consumption of goods and services that are less enjoyable and (2) continued investments in failing activities (Olivola, 2018;Arkes & Blumer, 1985;Thaler, 1980). These effects, named sunk-cost effects by Thaler (1980), have been variously termed escalation of commitment (Staw, 1976), investment trap, escalation bias or effect (Bornstein and Chapman, 1995), irrational escalation, toomuch-invested-to-quit syndrome, and throwing good money after bad (Garland, 1990). ...
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A general economic principle is that when evaluating the costs of a decision, sunk costs should not be considered and that the decision-maker should consider only those costs that are incurred as a result of making that decision. However, both anecdotal and empirical evidence has shown that when making decisions, people are influenced by sunk costs, thereby committing the sunk-cost fallacy. A corpus of research has established that this fallacy occurs among different nations and cultures to differing extents or degrees. However, none of the previous research was conducted on Nigerians. This study, therefore, investigates whether Nigerians, too, commit this fallacy and then identifies factors that affect Nigerians’ susceptibility to the fallacy. Employing a binary logit model, it was found that about 49 per cent of the respondents to questions based on a decision-making vignette committed the sunk-cost fallacy. The results also showed that locus of cost responsibility (whether the cost was borne by the decision maker or another person on behalf of the decision maker) and ethnicity (whether the decision maker is Yoruba or not) were significant determinants of susceptibility to sunk-cost fallacy. This suggests that in Nigeria sunk-cost fallacy is intrapersonal and more prevalent among the Yorubas than among the Hausas or the Igbos. Therefore, the sunk-cost fallacy is ubiquitous and more likely in personal decisions than decisions made on behalf of others.
... Unlike risky decision-making, riskless choice relates to prospect theory through the so-called endowment effect (EE) (Thaler, 1980;Kahneman et al., 1991). The endowment effect has been used as evidence for theories of reference-dependent preferences and loss aversion and it shows that the minimum amount of money people are willing to accept (WTA) when selling an item is significantly higher than the minimum amount they are willing to pay (WTP) for the same item if they do not already own it Ariely et al., 2005;Votinov et al., 2010Votinov et al., , 2013Camerer, 2011;Gächter et al., 2021). ...
... Results showed that the WTA/WTP ratio was significantly higher and thus we observed the predicted endowment effect. The finding aligns with previous literature (Thaler, 1980;Knetsch, 1989;Kahneman et al., 1991;Van Dijk and Van Knippenberg, 1998;Carmon and Ariely, 2000;Votinov et al., 2013;Gächter et al., 2021) that demonstrated an endowment effect across various types of goods (real owned and imaginary) as well for different types of transactions (goodsto-money, goods-to-goods). Moreover, as predicted, we found a larger endowment effect for hedonic compared to utilitarian items. ...
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Financial risk-taking and loss aversion are multifaceted phenomena that are the focus of neuroscience, psychology, and economics research. A growing number of studies highlighted the role of hormones and in particular testosterone on socio-economic decision-making. However, the effects of testosterone on risk-taking under framing and consumer-based choices and preferences are inconclusive. We investigated the effects of 100mg testosterone administration on aspects of decision-making within the prospect theory framework which is the most used descriptive model of decision-making under risk. We assessed risk-taking under framing and the endowment effect (effect of possession) using Bayesian modeling. Forty men participated in this double-blind placebo-controlled fully-randomized cross-over experiment and performed two tasks. One was a risk-taking task with binary choices under positive and negative framing associated with different probabilities. In the second task, participants had to bid money for hedonic and utilitarian items. We observed a significant increase in serum testosterone concentrations after testosterone administration. Compared to placebo, testosterone administration increased risk-taking under the positive framing (very large effect size) and decreased under the negative framing (moderate to small). The sensitivity to gain was positive in each framing. Our model showed that decision-making is jointly influenced by testosterone and by the trade-off between gains and losses. While the endowment effect was more pronounced for hedonic than for utilitarian items, the effect was independent of testosterone. The findings provide novel information on the complex modulatory role of testosterone on risk-taking and shed further light on mechanisms of behavioral economic biases. The proposed models of effects of individual differences in testosterone on risk-taking could be used as predictive models for reference-depended behavior under positive and negative framing with low and high probabilities.
... Von Neumann & Morgenstern, 1944 may not be appropriate as a descriptive model of human decision making (c.f. Allais, 1953;Ellison, 2006;Simon, 1957;Thaler, 1980). At last, since the 'heuristics and biases program' by Tversky and Kahneman (e.g. ...
... sunk costs), and neither presence nor absence of other options (e.g. Friedman, Pommerenke, Lukose, Milam, & Huberman, 2007;Luce, 1959;Thaler, 1980). This 'independence of irrelevant alternatives' is equivalent to the assumption of ordered preferences made by the decision maker who will select the highest-valued option in every presented subset of appendant items (c.f. ...
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Big data analysis, machine learning and data mining is almost contemporary, and many companies aspire profitable outcomes. However, collecting and describing might not be sufficient , and one must analyse and interpret the mass of information. Often this data is not meant for mining, and therefore great hope is with modern algorithms to find underlying, non-trivial patterns. However, most of these methods remain correlative and may be un-theoretical. Thus, big data analysis need thorough and comprehensible theory too, to interpret and understand its results. The study at hand has assumed human decision-irrationalities (e.g. asymmetrical domination and attraction) to be given, and has analysed real data made available by EuTrade. For theoretical, practical and, in particular, quantifiable interpretation of mutual influence of products arranged in shelves, a new key indicator has been introduced-the averaged impact factor (AIF) per product. Analysis have permitted indication for independence from a product's own revenue, and its corresponding family (and shelves, respectively). Furthermore, depending on the presence of a product in shelf, interacting with AIF has been associated with the daily product-family revenue. Based on current data, it has been pushed either by items with high impact present in shelf or by products with low impact out-of-shelf, and it has been reduced by products with a high AIF not present, and one with a low impact in shelf, respectively. Thus, with this new key indicator, the perspectives on product classification, replacement, shelves-arrangement or further purpose might be renewed. The study at hand has been explorative but, might give new possibilities for companies and research. Possible applications in practice, adaptions, adjustments, extensions and propositions for future research, are discussed.
... [7] Unfortunately, many conflate is with why. For instance, some top behavioral economists, such as Tversky and Kahneman (1986) and Thaler (1980), believed that their approach is a positive science about what people actually do. It seems that their view is only half right: right in the sense if their research ends up with factfinding and wrong because when continuing to explain their findings, they have to rely on some normative framework which comes from outside their behavioral experiments. ...
... One might argue that buyers also trade on many successive days, so losses and gains cancel out, and the long-term risk might be considerably smaller. However, real decision-makers have often been found to neglect future prospects [45], for example, because of cognitive biases such as mental accounting (e.g., [46,47]). Thus, an analysis based on a single trading day is not too unrealistic. ...
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The most important price for short-term electricity trading in Germany is the day-ahead auction price, which is provided by EPEX SPOT. Basically, short-term fluctuating electricity prices allow cost-optimized production planning by shifting electricity-intensive processes to times of favorable electricity prices. However, the day-ahead price as the outcome of an auction is not directly tradeable afterwards. We propose short-term flexible electricity certificates that pass on the day-ahead auction prices plus a premium for the supplier, enabling users to plan electricity consumption based on realized day-ahead auction prices. We analyze the supplier’s problem of delivering electricity based on such certificates. The supplier can adjust the required electricity volume after the close of the day-ahead auction on the continuous intraday market. We analyze the price fluctuations in this market in relation to the day-ahead price and propose different trading strategies. Using the order book history of EPEX SPOT, we analyze the trading success and risk of these strategies. Furthermore, we investigate to what extent trading success can be explained by changes in market conditions, and, in particular, we identify renewable forecast errors as a driver.
... Predictable earnings happen to point of reference for risk aversion (Baye & Prince, 2013). In fact, if individual possesses something, endowment effect raises the observed worth of the point over the will to give for similar item (Thaler, 1980). ...
... Filling the identified scientific gap can only occur through new empirical analyses, not by referring to studies in other countries, because the owner's home valuation bias may be largely due to the endowment effect. The latter is an anomaly from standard economic theory and, in the framework of behavioural economics, can be defined as the situation when people demand more for the surrender of an object than they would be willing to pay (WTP) for it (Thaler, 1980;Kahneman et al., 1991). In general, the endowment effect leads property owners to assign excessively high values to their flats, often well above what is justified by the market (Tur-Sinai et al., 2020). ...
Article
Purpose This paper aims to explore the drivers behind the accuracy of self-reported home valuations in the Warsaw (Poland) housing market. Design/methodology/approach In order to achieve the research goal, firstly, unique data on subjective residential property values estimated by their owners were compared with market-justified ones. The latter was calculated using geographically weighted regression, which allowed for taking into account spatially heterogeneous buyers' housing preferences. An ordered logit model was then used to identify the factors influencing the probability of the occurrence of bias towards over or undervaluation. Findings The results of the study revealed that, on average, homeowners overvalued their properties by only 1.94%, and the fraction of interviewees estimating their properties accurately ranges from 20% to 68%, depending on the size of the margin of error adopted. The drivers of the valuation bias variation were the physical, locational and neighbourhood attributes of the property as well as the personal characteristics of the respondents, for which their age and employment situation played a key role. Originality/value In contrast to previous studies, this is the first to examine drivers behind the accuracy of self-reported home valuations in a Central and Eastern Europe country. In addition, this work is the first to consider heterogeneous housing preferences when calculating objective property values.
... Kahneman (1979) offered crucial details about systematic biases that influence judgment. Investors, according to Thaler (1980), have limited willpower, therefore they prioritise current issues above future concerns, resulting in a variety of ways in which their short-term motives conflict with their longterm goals. Investors are known to have behavioral biases, even if their investment decisions are based on a rational decisionmaking process. ...
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The physiological behaviors in Colombo Stock Exchange to be discovered as they cause to have market anomalies in which is not technically driven and there are compared to other countries. The purpose of this study is to observe whether overconfidence bias and self-attribution bias exist in Colombo Stock Exchange. This study utilises the Structural Equation Modeling to analyse the collected data by using a questionnaire survey from 418 active individual investors in Colombo Stock Exchange. Out of the three stages of rational decision-making theory, it is observed that evaluating alternatives contribute to overconfidence bias and self-attribution biased significantly. Therefore, it is evidenced that if the investors do not concern on demand identification and evaluating alternatives correctly, investors may be influenced to overconfidence bias and self-attribution bias that the investors in Colombo Stock Exchange follow the theory of rational decision-making which related to evaluating alternatives. According to the findings of this study, there is a mixed result of both rational and irrational investor behavior. Hence, the investors in Colombo Stock Exchange display an apparently both rational and irrational behaviors in making investment decision processes. The findings of this study are imperative to investors, investment advisors, and policy makers etc. to have rational investment decisions in the Colombo Stock Exchange.
... The power of framing is closely related to another behavioral anomaly known as the endowment effect. While prospect theory was originally developed as a theoretical framework for studying decisions under risk, Thaler (1980) points out that some aspects also apply to risk-free decisions. The endowment effect means that people value things they own more than things they do not own. ...
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Behavioral economics suggests that people do not always decide rationally but are even predictably irrational. This gives rise to the concept of nudge, which creates an architecture of choices that encourages people to behave as they wish. Loss aversion is one of the best-known phenomena in behavioral economics and a central notion of the prospect theory. The main idea behind this phenomenon is that losses hurt more than gains feel good. The framing effect is a bias where people choose some options differently, depending on whether they are presented as a gain or a loss. In this quasi-experimental study, the authors examine the role of loss aversion and framing effects on students' engagement and academic success. This study aims to test the hypothesis that students will have a stronger reaction to the reduction of awarded points, as opposed to an increase of awarded points, as they progress through the course. This will motivate them to work harder and achieve better academic success. The results show significant differences between the two groups in favor of the group being graded using the point reduction grading scheme. This suggests that the power of loss aversion can be exploited to increase students' engagement and academic success. The existence of framing effect in this case has been demonstrated, which shows it might be possible to use the choice architecture to improve the student results.
... Third, anchoring is reinforced by loss aversion (Hall et al., 2012). Fourth, anchoring might occur because we value things more when they belong to us (Thaler, 1980), otherwise known as "endowed anchoring" (Garbuio et al., 2011). For example, Collinson and Wilson (2006), in a study of Japanese firms, reveal that established interdivisional and supplier relationships are over-valued because they are treated like an endowment, hampering firms' strategic flexibility. ...
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Purpose A decade after Powell et al. ’s (2011) seminal article on behavioral strategy, which called for models to solve real-world problems, the authors revisit the field to ask whether behavioral strategy is coming of age. The purpose of this paper is to explain how behavioral strategy can and has been used in real-world settings. Design/methodology/approach This study presents a conceptual review with case study examples of the impact of behavioral strategy on real-world problems. Findings This study illustrates several examples where behavioral strategy debiasing has been effective. Although no causal claims can be made, with the stark contrast between the negative impact of biased strategies and the positive results emerging from debiasing techniques, this study argues that there is evidence of the benefits of a behavioral strategy mindset, and that this should be the mindset of a responsible strategic leader. Practical implications This study presents a demonstration of analytical, debate and organizational debiasing techniques and how they are being used in real-world settings, specifically military intelligence, Mergers and acquisitions deal-making, resource allocation and capital projects. Social implications Behavioral strategy has broad application in private and public sectors. It has proven practical value in various settings, for example, the application of reference class forecasting in large infrastructure projects. Originality/value A conceptual review of behavioral strategy in the wild.
... Advocates of free distribution argue that pricing leads to distribution of products only to the 'richest of poor' while their critics counter that individuals do not value or even not use the products given away for free (Ashraf et al., 2010). The critics argument points us towards two behavioral theoriessunk cost fallacy (Thaler, 1980) and screening effect of prices (Roy, 1951), both of which states that, usage increases with prices. Cost-sharing or pricing health products are needed to avoid wastage of resources by those who do not need or who will not use the product (Cohen & Dupas, 2010). ...
Article
Should we distribute preventive animal health products for free or charge a positive price? The decision depends on the price sensitivity of the product and the effect prices have on product use. We explore this idea through a field experiment in which we randomize the price a farmer faces for an animal health product. We find that the demand for the product is highly sensitive to offer prices; willingness to pay (WTP) decreased from 44% at ₹ 100 to 18% at ₹ 500. Further, among farmers who were willing to pay, the product usage rate was 71% and usage did not increase in offer prices (lack of screening effect). Furthermore, we find that farmers whose animals were sick in the baseline had a higher WTP. These findings support the human capital model relating to demand for human health products. We argue that individuals behave in a similar way when the decisions concern their own health or the health of an animal they rear for commercial purposes. A highly subsidized distribution of the product is recommended due to high price sensitivity, lack of screening effect, equitable distribution among poor and lesser implementation costs found in this study.
... individuals are more reluctant to sell goods they already own and demand higher prices for these goods relative to what they are willing to pay to obtain them-a phenomenon known as the endowment effect (Thaler, 1980;Knetsch, 1989). The endowment effect is one of the most robust findings in the JDM literature (Kahneman et al., 1990), and several studies have revealed that the endowment effect exists for housing as well (Thaler, 1990;Genesove and Mayer, 2001;Einiö et al., 2008). ...
Article
Housing wealth is the single largest portion of household wealth in most Western societies today, yet little research has examined how individuals make decisions regarding the use of the housing wealth that they possess. In this article, we leverage insights from relational economic sociology to understand how individuals’ subjective valuations and other economic judgments are influenced when space in a home is relationally earmarked. Using a series of original vignette experiments and survey tasks in conjunction with qualitative responses, we find that earmarking a room for a close social tie does indeed matter for valuation. Furthermore, we reveal that individual economic judgments are strongly influenced by different relational content associated with relational earmarks compared to a control. Put differently, we systematically show how modifying the constitution of an earmark strengthens or lessens the appropriateness of its match and prompts distinct patterns of economic decision-making. Our analyses extend relational economic sociology to studies of housing while also building intellectual bridges with research on judgment and decision-making (JDM).
... The rigor of loss-control arrangements is a function of the extent to which political systems facilitate intersectoral power sharing (Demirgüç-Kunt et al., 2008). Seen through the lens of behavioral economics and the nudge theory (Thaler, 1980;Thaler & Sunstein, 2003), deposit guarantee offers a positive reinforcement to influence consumer choice and the behavior of individuals. It encourages them to make a decision that suits those who designed the institution of deposit guarantee, that is, to refrain from withdrawing bank deposits and from herd behavior, which are deemed irrational. ...
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The paper examines the Russian experience with explicit deposit guarantee. Some of its effects, such as moral hazard, adverse selection, and erosion of discipline, are typical and well-researched by previous authors. The social cost of having this institution in Russia turned out to be abnormally high, while the results in terms of bank stability are questionable. More than half of the insurance system members have gone out of business in a matter of just fifteen years. I examine the inception of deposit insurance in Russia, its design, implementation and political economy, using various theoretical approaches and combining qualitative with quantitative evidence. I argue that explicit deposit guarantee by a government agency was a priori redundant, in view of the extraordinary role of state-owned banks. The new institution was used as a tool for structural change and competition enhancement, which I regard as misuse. Deposit guarantee was enacted prematurely, before other essential institutions of bank regulation were in place. The political economy of deposit insurance reveals the political system’s vulnerability to uncontained pressure from private special interests demanding public protection. The new institution was captured by interest groups and exploited for private benefit. The evidence from Russia might be relevant to other emerging market countries.
... According to behavioral economics theory, the rational decision model is unable to fully describe the ecological The specific requirements of audit work are stipulated 2018 LOAANR fully implemented in China governance decisions of the leading cadres because their decision-making behaviors are inevitably affected by irrationality. The social preference perspective (Dohmen et al. 2011;Sutter et al. 2013), however, can provide a theoretical basis for the LOAANR policy influences on the local officials' psychological behaviors (Thaler 1980). Theoretically, the LOAANR should clarify and improve the leading cadres' evaluation and assessment frameworks for pollution control and environmental governance accountability; that is, as the officials' effective performances are not limited to only GDP indicators and are guided by the public opinion on ecological fairness, the LOAANR should result in substantial changes to the officials' decision-making. ...
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China is one of the largest agricultural countries in the world. In the context of China’s efforts to achieve dual carbon goals (carbon peak and carbon neutral), the need for carbon emissions reductions in the agricultural sector cannot be ignored. This study collected 2007 to 2018 data from 30 Chinese provinces and used a difference in differences (DID) model to investigate the relationships between China’s leading officials’ accountability audit of natural resources policy (LOAANR), agricultural technological progress, and agricultural carbon emissions intensities (CEI). A common trend test, placebo test, PSM-DID, and other test methods were used to verify the reliability of the results. The results show that (1) compared with the non-pilot areas, the policy implementation could significantly reduce CEI; (2) the LOAANR was able to stimulate patented technological progress (ATI) and mechanical technological progress (AMT), but different types of technological progress had different mediation effect sizes; and (3) the policy effects shows obvious regional heterogeneity, manifesting as west > east > central; and the policy effects were more obvious in the non-major grain-producing areas, but had no inhibition effects on the CEI in the major grain-producing areas; compared with low intensity market-based environmental regulation (MER) regions, high-intensity MER regions have stronger LOAANR emission reduction effects. Based on the study findings, policy suggestions are given to reduce agricultural carbon emissions and promote higher quality agricultural development.
... One would expect an anchor to be more salient if a work was sold relatively recently rather than a long time ago. By the same token, the tendency to place a larger value on an item in one's possession is called the endowment effect, which was introduced by Thaler (1980). This effect implies that loss aversion tends to be greater the longer the good is held. ...
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We provide evidence for the behavioral biases of anchoring and loss aversion in paintings sold at auction. We find that anchoring is more important for items that are resold quickly and that the effect of loss aversion increases with the time that a painting is held. This evidence contributes significantly to the empirical evidence of the endowment effect: of increasing loss aversion with the length of holding. However, we do not find evidence that investors can take advantage of these behavioral biases.
... Behavioral economics combines elements of economics and psychology to understand human behaviour: there are differences between what humans should do and what they actually do and the consequences of those actions (Thaler 1980). Neoclassical economics assumes that people have well-structured preferences and make self-interested decisions based on those preferences. ...
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In economics, the Expected Utility (EU) model is the normative benchmark for decision making under risk. However, empirical studies have shown that many behavioural phenomena are inconsistent with the predictions of this model. Observing empirical evidence, behavioural economics has demonstrated that people do not always make rational, or optimal, decisions, even if they have the information and tools with which to do so. People’s choices are influenced by their emotions and impulsiveness, and depend on their environment and circumstances (context): overconfidence, loss aversion, and self-control are the main statements in behavioural economics. Starting from past studies concerning the use of multi-criteria method based on prospect theory for describing people behavior (Gomes and Lima 1991), this paper aims at proposing a multi-criteria method as a tool to model some behavioural anomalies. It begins by analysing some decision problems proposed in the literature (Kahneman and Tversky 1979), showing that people’s preferences may violate some of the axioms of the EU model. Then, it proposes a multi-criteria approach to model human behaviour in these problems, that is, when emotional factors and cognitive biases influence people’s choices: e.g., the certainty effect and the reflection effect. Among several multi-critria methods, the ELimination Et Choix Traduisant la REalité (ELECTRE) method is used due to its main features: it allows dealing with positive and negative reasons in order to model the preferences, including with heterogeneous scales; its preference and indifference thresholds allow taking into account an imperfect knowledge of the data; no systematic compensation exists between “gains” and “losses”. The results show that the ELECTRE III method provides the same preferences expressed by the majority of respondents in the experiments considered. In other words, a multi-criteria tool accounts for some behavioural anomalies, in particular, those relating to certainty and reflection effects.
... The endowment effect is a term used to describe how ownership affects a good's value. For example, when people own an item, they place a higher value on them than if they don't (Thaler, 1980). Even if firms or establishments do not "own" labor in the property sense, employers may be less willing to exchange existing labor with other workers since they put a high value on their existing workers. ...
... If consumers appreciate the value of advice, so the balance of the mental account favours advice, then they will be willing to pay for it. Where incomplete information is utilised, this may be the consumer acting rationally, although perhaps 'boundedly' (Simon 1955;Thaler 1980;Mehta 2013). ...
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Shifts in welfare policy over the last forty years towards a greater neo-liberal stance have resulted in citizens needing to take greater responsibility for their finances (Rowlingson 2000; Strauss 2008; Sherraden and Ansong 2016). This coupled with low levels of financial capability across the UK population and consumers trying to make informed decisions from this low knowledge base (Sandler 2002; FSA 2004, 2006; Thoreson 2007, 2008; Arthur 2016; Stillwell 2016) suggests a growing need to understand the barriers that consumers face regarding access to financial advice. This paper argues that barriers preventing access to financial advice are not yet adequately understood. To build understanding three variables are explored, namely knowledge, trust and affordability/cost that are shown to affect consumers’ ability to access regulated financial advice. From these variables emerged the ideas that financial advice needed to be considered the ‘subjective norm’ and that ‘trust heuristics’, as a route to advice had certain embedded risks. As part of the research process a ‘Financial Advice Belief Model’ was developed as a tool to explore these variables more deeply and help interested stakeholders better understand factors that create barriers and may prevent consumers from seeking effective financial advice. Addressing these factors, we use the case of the UK to illustrate possible ways forward and argue that the findings could apply in other developed country settings. Further, these three key variables affecting access to needed financial services should be a key consideration for the UK’s Money and Pensions Service as it looks to develop a wider focus on financial well-being as the core of its strategy for UK citizens in need of financial guidance.
... Finally, the reference-dependent account entails that the preselected option is coded as already chosen, becoming the status quo, thus acting like an instant endowment (Dinner et al., 2011). The endowment effect is the tendency to consider an object as more valuable when it is owned than when it is not-owned (Thaler, 1980). The logic behind it is that if we ask a certain price to sell an object we own, but we are willing to pay less for the same object as buyers, it means that the reference point is set forth by the endowment, whereas giving up the object is framed as a loss. ...
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The framing effect leads people to prefer a sure alternative over a risky one (risk aversion) when alternatives are described as potential gains compared to a context-dependent reference point. The reverse (risk propensity) happens when the same alternatives are described as potential losses. The default effect is the tendency to prefer a preselected alternative over other non-preselected given options, without facilitating nor incentivizing the choice. These two effects have mainly been studied separately. Here we provided novel empirical evidence of additive effects due to the application of both framing and default within the same decision problem in a large sample size (N = 960). In the baseline condition, where no default was provided, we measured the proportion of risky choices in life-or-death and financial decisions both presented in terms of potential gains or losses following the structure of the Asian disease problem. In the sure default condition, the same layout was proposed with a flag on the sure option, whereas in the risky default condition, the flag was on the risky option. In both default conditions, we asked participants whether they wanted to change the preselected option. Overall, the comparison between these conditions revealed three distinct main effects: (i) a classic framing effect, (ii) a larger risk propensity in the life-or-death scenario than in the financial one, and (iii) a larger default effect when the flag was on the risky, rather than on the sure, option. Therefore, we conclude that default options can enhance risk propensity. Finally, individual beliefs about the source of the default significantly moderated the strength of the effect. Underlying mechanisms and practical implications are discussed considering prominent theories in this field.
... 8 Survey-based valuation studies have been used to assess the benefit of environmental (e.g., the recreation value of national parks), health (e.g., the value of increased ambulance services), and transportation policies (e.g., alternative fuel vehicles), see Carson and Hanemann (2005). 9 The endowment effect describes the finding that people assign a higher value to an object if they own it than if they do not own it (Thaler, 1980). 10 In terms of the acceptance rate for a contact-tracing app, the WTP approach elicits a higher acceptance rate (i.e. a lower opt-out rate) and a lower monetary value, compared to WTA (see also section "Implementation of the theoretical framework"). ...
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... Loss aversion is one of the basic characteristics of human behavior. Kahneman and Tversky [5] found that most people are risk-averse in the face of gain, and people are more sensitive to loss than gain, and the pain of loss is much greater than the pleasure of gain. Decision maker has his own risk degree, which affects the final decision. ...
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... According to a poll conducted by the MetLife Mature Market Institute, 71% of baby boomers who plan to work post-retirement desire part-time work and flexible arrangements (Stein Wellner, 2002). This tendency to desire flexible work arrangements can be explained in terms of what Thaler (1980) described as an endowment effect. This perspective holds that once people possess something they immediately value it more than before they possessed it. ...
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Chapter
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Chapter
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Understanding the elements that influence buyers' purchase intentions is critical for real estate companies. The goal of this study is to develop a model for investigating behavioural intentions to purchase apartments in Bangladesh. To obtain the preliminary elements, the Theory of Planned Behaviour (TPB) was used as the underpinning theoretical framework. Other elements relevant to the study context were identified by an extensive literature review, which was subsequently evaluated by industry experts. A systematic questionnaire was used to collect two hundred and thirty-six samples. To find the relevant factors, an exploratory factor analysis (EFA) was used. In addition to the criteria mentioned by the TPB, the results reveal three additional aspects: perceived physical quality, access to money, and favourable government policy. The study contributes to the literature by presenting an extended TPB model suitable for studying behavioural intention to buy apartments in an emerging country.
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Although many economists, most notably Strotz, have discussed dynamic inconsistency and precommitment, none have dealt directly with the essence of the problem: self-control. This paper attempts to fill that gap by modeling man as an organization. The Strotz model is recast to include the control features missing in his formulation. The organizational analogy permits us to draw on the theory of agency. We thus relate the individual's control problems with those that exist in agency relationships.
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Results of experiments designed to test the claim of psychologists that expected utility theory does not provide a good descriptive model are reported. The deviation from tested theory is that, in revising beliefs, individuals ignore prior or base-rate information contrary to Bayes rule. Flaws in the evidence in the psychological literature are noted, an experiment avoiding these difficulties is designed and carried out, and the psychologists' predictions are stated in terms of a more general model. The psychologists' predictions are confirmed for inexperienced or financially unmotivated subjects, but for others the evidence is less clear.
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In a choice among assured, familiar outcomes of behavior, impulsiveness is the choice of less rewarding over more rewarding alternatives. Discussions of impulsiveness in the literature of economics, sociology, social psychology, dynamic psychology and psychiatry, behavioral psychology, and "behavior therapy" are reviewed. Impulsiveness seems to be best accounted for by the hyperbolic curves that have been found to describe the decline in effectiveness of rewards as the rewards are delayed from the time of choice. Such curves predict a reliable change of choice between some alternative rewards as a function of time. This change of choice provides a rationale for the known kinds of impulse control and relates them to several hitherto perplexing phenomena: behavioral rigidity, time-out from positive reinforcement, willpower, self-reward, compulsive traits, projection, boredom, and the capacity of punishing stimuli to attract attention. (31/2 p ref)
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"This is the classic work upon which modern-day game theory is based. What began more than sixty years ago as a modest proposal that a mathematician and an economist write a short paper together blossomed, in 1944, when Princeton University Press published Theory of Games and Economic Behavior. In it, John von Neumann and Oskar Morgenstern conceived a groundbreaking mathematical theory of economic and social organization, based on a theory of games of strategy. Not only would this revolutionize economics, but the entirely new field of scientific inquiry it yielded--game theory--has since been widely used to analyze a host of real-world phenomena from arms races to optimal policy choices of presidential candidates, from vaccination policy to major league baseball salary negotiations. And it is today established throughout both the social sciences and a wide range of other sciences. This sixtieth anniversary edition includes not only the original text but also an introduction by Harold Kuhn, an afterword by Ariel Rubinstein, and reviews and articles on the book that appeared at the time of its original publication in the New York Times, tthe American Economic Review, and a variety of other publications. Together, these writings provide readers a matchless opportunity to more fully appreciate a work whose influence will yet resound for generations to come.
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"An experiment was conducted to test the hypothesis that persons who undergo an unpleasant initiation to become members of a group increase their liking for the group; that is, they find the group more attractive than do persons who become members without going through a severe initiation. This hypothesis was derived from Festinger's theory of cognitive dissonance." 3 conditions were employed: reading of "embarrassing material" before a group, mildly embarrassing material to be read, no reading. "The results clearly verified the hypothesis." (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Discusses how human beings bind or "precommit" themselves as a protection against their own irrationality, as Ulysses made his crew bind him to the mast lest he succumb to the sirens' song. Examples of this imperfect rationality are cited from many fields: consumer behavior, experimental psychology, the history of philosophy, the philosophy of mind, and moral psychology. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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This epperiment represents an attempt to rule out a number of alternative explanations of an effect found in a previous experiment by Aronson and Mills. This effect, that the more a person suffers in order to obtain something, the greater will be the tendency for him to evaluate it positively, was predicted from dissonance theory. By modifying the original experiment in a number of ways, and applying additional treatment variations, these other hypotheses were effectively ruled out, thus lending considerable additional support to the original “suffering-leading-to-liking” hypothesis.
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This article described three heuristics that are employed in making judgements under uncertainty: (i) representativeness, which is usually employed when people are asked to judge the probability that an object or event A belongs to class or process B; (ii) availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a class or the plausibility of a particular development; and (iii) adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available. These heuristics are highly economical and usually effective, but they lead to systematic and predictable errors. A better understanding of these heuristics and of the biases to which they lead could improve judgements and decisions in situations of uncertainty.
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This paper investigates the impact of a negative income tax and a program of schooling subsidies on the demand for schooling of adult heads of families. A two-period model of labor supply is developed in which schooling is incorporated. An empirical version of the model is estimated using data from the first three years of the Seattle and Denver Income Maintenance Experiments. Strong effects of the schooling subsidies were found, but net effects of the negative income tax on schooling were not significant. The magnitude of the schooling subsidy effects implies a substantial positive social rate of return to schooling subsidies.
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Analysis of decision making under risk has been dominated by expected utility theory, which generally accounts for people's actions. Presents a critique of expected utility theory as a descriptive model of decision making under risk, and argues that common forms of utility theory are not adequate, and proposes an alternative theory of choice under risk called prospect theory. In expected utility theory, utilities of outcomes are weighted by their probabilities. Considers results of responses to various hypothetical decision situations under risk and shows results that violate the tenets of expected utility theory. People overweight outcomes considered certain, relative to outcomes that are merely probable, a situation called the "certainty effect." This effect contributes to risk aversion in choices involving sure gains, and to risk seeking in choices involving sure losses. In choices where gains are replaced by losses, the pattern is called the "reflection effect." People discard components shared by all prospects under consideration, a tendency called the "isolation effect." Also shows that in choice situations, preferences may be altered by different representations of probabilities. Develops an alternative theory of individual decision making under risk, called prospect theory, developed for simple prospects with monetary outcomes and stated probabilities, in which value is given to gains and losses (i.e., changes in wealth or welfare) rather than to final assets, and probabilities are replaced by decision weights. The theory has two phases. The editing phase organizes and reformulates the options to simplify later evaluation and choice. The edited prospects are evaluated and the highest value prospect chosen. Discusses and models this theory, and offers directions for extending prospect theory are offered. (TNM)
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