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RSM100Y1 Lecture Notes - Marginal Utility, Prospect Theory, Bernard Madoff

Rotman Commerce
Course Code
John Oesch

of 2
RSM 101 -
Bernie Madoff
o Social proof
Integrative thinking
Mental model
o A representation in the mind of a person, thing, phenomena or
o Mind-sets
Collection of assumption about a situation or practice
International Vs. Domestic mindset
Coaching Vs. Controlling mindset
Coaching: listening, advice
Controlling: Orders, set rules
Can be limiting or enabling
When an established mindeset is disrupted: paradigm shift
Thomas kuhn
o Schema
How we organise knowledge about particular concepts and
Generalisations of instances of experience
Person schema
o For each individual that we know (attributes,
Event schema
o Scripts
Representations of knowledge about how
to approach tasks, problems, decisions,
situations, in which we act
Script violation leads to uncertainty and
Role schema
o Expectations about what people will/should do
o Without our knowledge or consent
Self schema
o Mental representations of reality
o “theories in use”
Common Fallacies
o I know the truth (and I assume there is a truth)
o You disagree with me, so you must be wrong
o If we cannot agree, the best thing is to compromise (either choose or
dilute to keep peace)
Why do we cling to our models?
o Typical thinking pattern, problems
o Brain is powerful but not perfect
Model Persistence
o The use of simple rules of thumb and resulting biases (heuristics)
o Availability: judgement is a function of how easily instances are
brought to mind
o Representativeness: judgement is a function of the similarity of an
instance to a larger set
o Anchoring and adjustment: judgement is driven by a salient number
in the environment
Prospect theory
o Diminishing marginal utility
o Area under the curve for losses is greater than area under curve for
o We respond more strongly to losses than we do to gains
o BMW take it for the weekend when you give it back you feel like
you’re losing something
o Weather forecasters deal with being wrong every day that’s why
they’re not overconfident