Deck 11: Behavioral Decision Theory

Question 1

Liz is considering buying a new refrigerator for $1,000.It has a 20% chance of requiring a repair in the next year.
The expected value in terms of repair costs for this purchase is $1,200.

Answer 1

False

Question 2

Due to the sunk cost effect, people are often reluctant to walk away from buying something after they have invested lots of time and effort in searching for and evaluating the product.

Answer 2

True

Question 3

In the framing effect, preferences are said to have "reference dependence."

Answer 3

True

Question 4

Price bundling is often used by firms to segregate consumer losses.

Question 5

The framing effect is in direct violation to the invariance principle.

Question 6

The fact that the difference between $0 and $100 seems larger than the difference between $1000 and $1,100 is due
to loss aversion.

Question 7

If a consumer likes brand A more than brand B and likes brand B more than brand C, then it follows that the consumer must like brand A more than brand C too.This is an example of the invariance principle.

Question 8

For consumers, many small gains are not as pleasant as one large gain, which means marketers should aggregate
consumer gams.

Question 9

Research on the framing effect shows that people tend to overestimate the likelihood of very small probabilities, which makes lotteries seem more attractive than they really are.

Question 10

Expected utility theory suggests that all alternatives can be rank ordered from worst to best and that alternatives with the highest expected values should be preferred.

Question 11

According to the framing effect, when people think of decisions in terms of positive outcomes, they are risk averse.

Question 12

In preference reversal, subjects prefer one gamble when they anchor on outcomes and another when they anchor on probabilities.

Question 13

Loss aversion implies that losses have a bigger impact on people, relative to equivalent gains.

Question 14

As risk perceptions increase, fear appeals become less effective.

Question 15

According to expected utility theory, people should think about uncertain events in terms of frequencies.

Question 16

The brand positivity effect is the tendency to view a product as more valuable if one owns it (vs.does not own it).

Question 17

Rogaine (a hair replenishment product) uses the framing effect when it states that 26% of men who use the product get excellent results.

Question 18

In both the endowment effect and sunk cost effect consumer tend to overestimate opportunity costs.

Question 19

Choice deferral refers to a reluctance to make a decision for some reason.

Question 20

Research on loss aversion shows that people would rather lose $100 in $10 increments, over 10 occasions, than lose the $100 dollars all at once.

Question 21

Selective thinking influences the degree to which consumers rely on the price-quality heuristic.

Question 22

Selective thinking could also be called one-sided thinking.

Question 23

Selective thinking is more likely to occur in singular (vs.comparative) evaluation.

Question 24

If a consumer likes pizza more than lasagna and likes lasagna more than spaghetti, then it follows that the consumer must like pizza more than spaghetti too.This example is an example of what concept?

A)Invariance principle
B)Transitive principle
C)Choice deferral principle
D)Domination principle
E)None of the above is correct.

Question 25

Research shows that when consumers expect to have to fill out a customer satisfaction survey, they focus mainly on positives to make themselves look good.

Question 26

Questions about money lead consumers to focus on money and questions about probabilities lead consumers to focus on probabilities.This is the basis of the dominance principle.

Question 27

Decision making under uncertainty where different outcomes are possible with different probabilities form the basis of:

A)consumer behavior
B)risky decision making
C)the get-got gap
D)selective thinking
E)the sunk cost effect

Question 28

Comparative evaluation is easier, and therefore, more common than singular evaluation.

Question 29

When you ask a consumer to reject some alternative, he/she will probably focus selectively on negative attributes due to selective thinking.

Question 30

According to expected utility theory, people should think about uncertain events in terms of:

A)the get-got gap
B)frequencies
C)gambles
D)selective thinking
E)the sunk cost effect

Question 31

Lois is consideriog buyiog a new bicycle for $200.It has a 20% chance of breaking down in the next year.What is the expected value in terms of repair cost for this purchase?

A)$240
B)$400
C)$20
D)$200
E)$40

Question 32

In both singular evaluation and comparative evaluation, attributes that are familiar and easy to evaluate (versus unfamiliar and difficult to evaluate) have a greater impact on preference.

Question 33

Which of the following statements about the framing effect is false?

A)The framing effect violates the invariance principle.
B)In the framing effect, preferences are said to have "reference dependence."
C)When people think of decisions in terms positive outcomes they tend to be risk seeking.
D)The framing effect can be seen across a wide variety of decision contexts.
E)The framing effect can cause preference reversals.

Question 34

As part of expected utility theory, what principle states that preferences should remain the same no matter how preferences are measured and no matter how decision alternatives are described?

A)Probability principles
B)Transitive principle
C)Choice deferral principle
D)Domination principle
E)Invariance principle

Question 35

Selectively overestimating the magnitude of the relationship between price and quality can be attenuated when consumers are motivated to consider exceptions to the relationship.

Question 36

Nick is consideriog buyiog a new bicycle.Here are his options: Bike A- costs $100.It has a 60% chance of breaking down in the next year.Bike B- costs $200.It has a 20% chance ofbreakiog down in the next year.Bike C- costs $400.It has a 15% chance ofbreakiog down in the next year.
Which bike should Nick purchase based on expected utility theory of repair costs?

A)Bike A
B)BikeB
C)Bike C
D)Either bike A or C
E)We can't possibly answer the question with the ioformation provided.

Question 37

In singular evaluation, consumers evaluate products one-at-a-time.

Question 38

Research shows that American consumers are typically more overconfident in their decision making than Asian
consumers.

Question 39

suggest(s) all alternatives can be rank-ordered from worst to best and that alternatives with highest expected values should be preferred.

A)Framing effects
B)The law of large numbers
C)The endowment effect
D)Expected utility theory
E)Bounded rationality theory

Question 40

Research on the framing effect shows that decision makers are risk averse when they focus on and risk seeking when they focus on .

A)gams; gams
B)gains; losses
C)losses; gains
D)losses; losses
E)None of the above is correct.

Question 41

Consider the following example: Consumers are asked to evaluate two digital camera cards: Capacity Distortion Factor
Camera A: can hold 350 pictures .002
Camera B: can hold 400 pictures .I Camera C: can hold 450 pictures .2
Distortion factor was defmed for consumers since most consumers are unfamiliar with this attribute.(Consumers were told that distortion factor lowers the picture quality, and a lower number is better).
Under singular evaluation, consumers should prefer which brand?

A)A
B)B
C)c
D)AandB
E)All of the brands equally.

Question 42

The is the tendency to view a product as more valuable if one owns it.

A)sunk cost effect
B)transitivity effect
C)compatibility principle
D)brand positivity effect
E)None of the above is correct.

Question 43

Questions about money lead consumers to focus on money.Questions about probabilities lead consumers to focus on probabilities.This is the basis of what concept?

A)The compatibility principle
B)Choice deferral
C)The endowment effect
D)Comparative evaluation
E)The sunk cost effect

Question 44

Sally buys a painting at a garage sale for $25.A houseguest sees the painting hanging in Sally's house and offers to buy the painting from her for $50.Sally does not want to sell the painting despite the fact that she would never pay this much for a similar painting.

A)sunk cost effect
B)endowment effect
C)compatibility principle
D)brand positivity effect
E)None of the above is correct.

Question 45

Which of the following factors does not potentially cause preference reversal:

A)singular vs.comparative evaluation
B)the compatibility principle
C)the framing effect
D)the sunk cost effect
E)All of the above potentially cause preference reversals.

Question 46

Which of the following is not a concept that helps explain the framing effect?

A)Diminishing sensitivity
B)Transitivity
C)Loss aversion
D)Reference dependence
E)Risk aversion

Question 47

Spending $100 on groceries seems like a lot of money to a poor person and like little money to a wealthy person. This statement represents what concept?

A)Reference dependence
B)Preference reversal
C)The sunk cost effect
D)The law of large numbers
E)Invariance principle

Question 48

Which of the following statements about the concept of loss aversion, as it relates to the framing effect, is true?

A)Loss aversion implies that losses have a bigger impact on people, relative to equivalent gains.
B)People tend to overestimate the likelihood of very small probabilities.
C)Loss aversion can violate the dominance principle.
D)Loss aversion implies that marketers should aggregate loses for customers.
E)All of the above statements are true.

Question 49

Paul went to the store to purchase a new refrigerator but quickly got so overwhehned by all the features of the various choices that he ended of going horne empty-handed.This is an example of:

A)selective processing
B)framing effect
C)the brand positivity effect
D)choice deferral
E)the endowment effect

Question 50

In order to keep customers happy, cruise lines typically include the price of the cruise, the room, the meals, the beverages, and the poolside snacks into the overall price of the cruise.This is an example of:

A)risk aversion
B)transitivity
C)price bundling
D)expected utility theory
E)the sunk cost effect

Question 51

Consumers are more likely to buy ground beef described as 75% lean as opposed to 25% fat.This is an example of which phenomenon?

A)Attraction effect
B)Compromise effect
C)Preference reversal
D)Framing effect
E)Endowment effect

Question 52

Excessive concern about possible future feelings of regret can lead consumers to commit:

A)selective processing
B)loss aversion
C)the brand positivity effect
D)choice deferral
E)the endowment effect

Question 53

George was examining a sweater at a department store.When he considered the color in terms of what his male friends might say, he decided he didn't like it.But then, his girlfriend walked up beside him and said he would look good in the sweater.Suddenly, the sweater was more appealing.George is experiencing:

A)loss aversion
B)risk invariance
C)the endowment effect
D)preference reversal
E)the sunk cost effect

Question 54

In the endowment effect and the sunk cost effect, consumers underestimate:

A)motivation
B)expected utility
C)opportunity costs
D)selective processing
E)the diminishing sensitivity effect

Question 55

The idea that as preferences change when reference points related to those preferences change is known as what concept?

A)Reference dependence
B)Preference reversal
C)The framing effect
D)The base rate
E)Invariance principle

Question 56

The is the tendency to not give up a product or service because a significant amount of time, money, or effort has already been invested in it.

A)sunk cost effect
B)endowment effect
C)compatibility principle
D)brand positivity effect
E)choice deferral effect

Question 57

"Losses loom larger than gains." What concept explains this statement?

A)Diminishing sensitivity
B)Transitivity
C)Loss aversion
D)Preference reversal
E)Risk aversion

Question 58

Loss aversion implies that marketers should aggregate and segregate .

A)gams; gams
B)gains; losses
C)losses; gains
D)losses; losses
E)None of the above is correct.

Question 59

When a consumer evaluates products two or more at a time, we call this:

A)singular evaluation
B)choice deferral
C)the compatibility principle
D)selecting thinking
E)None of the above is correct.

Question 60

Terri decides to take golf lessons and pays $300 for 10 lessons.After the 4th lesson, Terri has decided she hates golf.She continues to play (unhappily) saying, "I don't want to waste the $300!" Terri is experiencing the:

A)sunk cost effect
B)endowment effect
C)invariance effect
D)brand positivity effect
E)diminishing sensitivity effect

Question 61

Defme the brand positivity effect.

Question 62

Consider the following example: Imagine that Mary is planning a vacation and has to choose between two vacation spots.Based on the phenomenon of selective thinking, if asked to reject a choice, which spot would Mary reject?
Spot A average weather average beaches
Medium-quality hotel medium-temperature water average nightlife
Spot B lots of sunshine
Gorgeous beaches and coral reefs ultra-modern hotel
Very cold water very strong winds
No nightlife
Spot C mostly rainy rocky beaches
Older hotel
Very cold water very strong winds
No nightlife

A)Spot A
B)SpotB
C)SpotC
D)Either A orB
E)We can't answer the question with the information provided.

Question 63

What is a preference reversal and what causes a preference reversal?

Question 64

Consider the following example: Imagine that Mary is planning a vacation and has to choose between two vacation spots.Based on the phenomenon of selective thinking, if asked to choose the best spot, which would Mary choose?
Spot A average weather average beaches
Medium-quality hotel medium-temperature water average nightlife
Spot B lots of sunshine
Gorgeous beaches and coral reefs ultra-modern hotel
Very cold water very strong winds
No nightlife
Spot C mostly rainy rocky beaches
Older hotel
Very cold water very strong winds
No nightlife

A)Spot A
B)SpotB
C)SpotC
D)Either A orB
E)We can't answer the question with the information provided.

Question 65

When it comes to gains versus losses, what does the concept of loss aversion imply for marketers?

Question 66

Define the sunk cost effect and provide an example of this effect.

Question 67

Consider the following example:
Jolrn is looking to purchase a used couch off ofEbay.com.He wants to get a large couch to fill a large rec-room.
Length Any defects?
Couch A: 6 feet Yes, the armrest is tom
Couch B: 4 feet No, it's like new
Predict which couch will be preferred under singular evaluation and which will be preferred under comparative evaluation.Why?

Question 68

When questions are framed negatively, people tend to respond differently than when problems are framed positively.
Explain this.

Question 69

Consider the following example:
Imagine that Mary is planning a vacation and has to choose between two vacation spots.Based on the information, if asked to choose the best spot, which would Mary choose? If asked to reject a choice, which vacation spot would Mary reject? Why?
Spot A average weather average beaches
medium-quality hotel medium-temperature water average nightlife
Spot B lots of sunshine
gorgeous beaches and coral reefs ultra-modern hotel
very cold water very strong winds
no nightlife

Question 70

What is the compatibility principle and how does the compatibility principle change people's preferences?

Question 71

Nick is considering buying a new bicycle.Here are his options:
Bike A- costs $100.It has a 60% chance of breaking down in the next year.Bike B- costs $200.It has a 20% chance of breaking down in the next year.
Bike C- costs $400.It has a 15% chance of breaking down in the next year.
Which bike should Nick purchase based on expected utility theory of repair costs?

Question 72

Consider the following example: Consumers are asked to evaluate two digital camera cards: Capacitv Distortion Factor
Camera A: can hold 375 pictures .002
Camera B: can hold 400 pictures .I Camera C: can hold 400 pictures .2
Distortion factor was defmed for consumers since most consumers are unfamiliar with this attribute.(Consumers are told that distortion factor lowers the picture quality, and a lower number is better).
Under comparative evaluation, consumers should prefer which brand?

A)A
B)B
C)c
D)AandB
E)All of the brands equally.

Question 73

The shows that consumers form unrealistically favorable evaluations of moderately favorable brands when they form singular evaluations, but not when they form comparative evaluations.

A)endowment effect
B)dominance effect
C)brand positivity effect
D)framing effect
E)None of the above is correct.

Question 74

Define the endowment effect and provide an example of this effect.

Question 75

Consumers often overestimate the strength the relationship between price and quality, leading to an over-reliance on the price-quality heuristic.This is due to what phenomenon:

A)endowment effect
B)dominance effect
C)selecting thinking
D)framing effect
E)None of the above is correct.

Question 76

Explain the statement, "Losses loom larger than gains."

Question 77

Why do consumers often fail to maximize expected value, leading to choices they later regret?