Test 2 chp5&8

location of the reference point

as a critical effect on whether the decision is positively or negatively framed and influences the preference of the decision maker.

Motivated blindness:

when people have an incentive to not notice data or available information, they are able to overlook it.• E.g., Stanford Prison Experiment.

Conflicts of interest

A long line of evidence suggests that conflict of interest between our self-interest and the interest of othersleads to biased decision-making despite the best intentions of people not to be biased by their self-interest.

Pay differentials decrease organizational and team performance

Companies with more pay equity tend to produce better products than ones with pay inequity.•Major league baseball teams with more pay equity tend to perform better than those with pay inequity.•The gap between CEO pay and the pay of the average executive is negatively correlated with performance.

Competitive irrationality•

Competitive motive to 'win' rather than to seek one's own gain (e.g., $20 bill auction).• Competitive irrationality is not so much a cause of escalation, but a mechanism that can enhance it.

mpression management•

Managing the impression of others (e.g., "save face").

We also know that groups and individuals have different tendencies to escalate.•

Overall, groups are less likely to escalate their commitment to a course of action because with more members, it is more likely that at least one person can recognize the irrationality of continued escalation.• However, groups that do escalate commitment do so to a greater degree than individuals that escalate.

positive characteristics•

People are less likely to associate positive characteristics with out-groupmembers than with in-groupmembers.

Which of the two programs would you favor?

Scenario #1• Imagine that the United States is preparing for the outbreak of an unusual disease that is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the scientific estimates of the consequences of the programs are as follows. • Program A: If Program A is adopted, 200 people will be saved.• Program B: If Program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved. Scenario #2• Imagine that the United States is preparing for the outbreak of an unusual disease that is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the scientific estimates of the consequences of the programs are as follows. • Program C: If Program C is adopted, 400 people will die. • Program D: If Program D is adopted, there is a one-third probability that no one will die and a two-thirds probability that 600 people will die. Scenario #1and Scenario #2are objectively identical.•Most people choose A in Scenario #1 and D in Scenario #2.• Risks concerning perceived gains (e.g., saving lives; options A&B) versus perceived losses (e.g., losing lives; options C&D) differently.

• Perceptual biases •

Seeking to confirm our previously made decisions; filtering out disconfirming information.• We need to vigilantly seek out disconfirming information to balance out confirming information.

Though it may be rational to increase prices in response to increases in demand, people may be upset by what they perceive to be an unfair price increase that takes advantage of others' misfortune.

This problem illustrates that perceptions of fairness and ethics often cause decisions to deviatefrom what would be predicted by economic theory.

The cause of a setback also plays an important role.•

When a setback can be directly blamed on a person, they are not much more likely to continue investing additional costs following a failure than following a success.• However, when a setback can be blamed on external factors, people invest a great deal more resources into an initial decision following a failure than following a success.

People often feel a need to justify their prior decisions (self-justification).•

When others fail, people don't feel a need to justify their prior decisions by investing more costs into their prior decision.• However, when people are the only ones who fail, they are particularly likely to invest costs into their prior decisions following an initial failure.

Framing:

alternativewording of the same objective information that significantly alter the decisions that people typically make, even though differences between frames should have no effect on a rational decision.•Implicit reference points• Lives saved vs. lives lost• A rational decision should result in the same choice.

Bounded ethicality:

psychological processes that lead people to engage in ethically questionable behaviors that are inconsistent with their own preferred ethics.

Escalation of commitment:

the pervasive tendency to increasingly commit resources into the pursuit of an initial goal or decision, irrespective of evidence suggesting that it is best to abandon our initial goal or decision.

judgmental bias

• Failing to acknowledge the framing of a situation.•E.g., winning vs. losing mon

Framingprice increases as deviations from list price versus discount price can impact perceptions of fairness.

•In Example A, people perceive an increase in price from list price to be unfair.•In Example B, people are less likely to consider an identical increase in price from discount price to list price to be unfair.