[Loss aversion] we prefer avoiding losses to acquiring equivalent gains
Loss aversion is a notion derived from behavioral economics. In finance, this aversion to loss is reflected in the reluctance to dispose from an asset at a price lower than its purchase price. Theorized by Daniel Kahneman, the phenomenon highlights the fact that, for the same amount, individuals give more importance to a loss than a gain. To understand the concept, analysts use a game allegory which shows two hypotheses:
1 ° In the first, one wins 500 dollars;
2 ° In the second, one tosses a coin. Heads get 1,000 dollars, tails, is a loss.
Most people will choose the first hypothesis, for they’d rather keep 500 dollars than risk not to win 1,000.
Another game illustrates this loss aversion phenomena. Again, two cases :
1 ° In the first case, the player loses 500 dollars and must give it away at the very same moment;
2 ° In the second, the player flips a coin: heads, he loses nothing, tails, he losses 1,000 dollars.
The players in this experience by Kahneman and Tversky have opted for the second option because, like most economic agents, they have experienced a loss aversion because of the hope of winning and a symmetrical attraction to the risk in the case of a risk of loss.
Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance. Outside of textbooks and casinos, probability almost never presents itself as a mathematical problem or a brain teaser. Mother Nature does not tell you how many holes there are on the roulette table, nor does she deliver problems in a textbook way (in the real world one has to guess the problem more than the solution).
A "sunk cost" is just what it sounds like: time or money you've already spent. The sunk-cost fallacy is when you tell yourself that you can't quit because of all that time or money you spent. We shouldn't fall for this fallacy, but we do it all the time.
Dominated Alternatives: Can introducing a third decoy option make you more likely to choose the option, I secretly want you to choose?
In marketing, this is also called the decoy effect or attraction effect or asymmetric dominance effect. A phenomenon whereby the introduction of a third option leads to a change in choice.
Dominated alternatives here quickens the choice patterns of consumers by dulling the relevance of one option by the introduction of another, thereby making one option almost invalid.
More simply, when deciding between two options, an unattractive third option can change the perceived preference between the other two.
Yerkes and Dodson's experiment should make us wonder about the real rela- tionship between payment, motivation, and performance in the labor ...
In 1986, psychologist and economist Daniel Kahneman showed that even profit-maximizing firms will have an incentive to act as a manner that is perceived as fair to their customer. People have a tendency to resist unfairness as soon a profit-maximizing agent or a firm is seeking to overly exploit some profit opportunities.
For instance, a question was put to 191 adult residents in Vancouver: When football games tickets are in great demand, which one of the allocation methods seems the most and least fair?
- By auction: the tickets are sold to the highest bidders.
- By lottery: the tickets are sold to the people whose names are drawn.
- By queue: the tickets are sold on a first-come first-served basis.
Auction came out as the least fair (75% of the respondents) and queuing being the most fair.