PSYC 180 Lucy Luo
Behavioural economics, aka judgement and decision making (JDM)
In economics, rationality provides the foundation for economic theories, predictions, and
The Truth about Relativity
(Why everything is relative, even when it shouldnt be)
Humans rarely choose things in absolute terms. Rather, we focus on the relative
advantage of one thing over another, and estimate values accordingly.
We not only tend to compare things with one another but also tend to focus on comparing
things that are easily comparable and avoid comparing things that cannot be compared
We can control the circles around us, moving towards smaller circles that boost our
relative happiness. We can also change our focus from narrow to broad.
The more we have, the more we want. The only cure is to break the cycle of relativity.
The Fallacy of Supply and Demand
(Why prices are up in the air)
In order to make a man cover a thing, it is only necessary to make the thing difficult to
Imprinting: making initial decisions based on what is available in the environment and
sticking with the decision once it has been made. E.g. baby ducks following their mother
(or a human, if they are the first thing the gosling sees)
Imprinting and anchoring (the first price we see of a product) affects us as well.
Arbitrary coherence: although initial prices are arbitrary, once those princes are
established in our minds they will shape not only present prices but also future prices.
Once someone is willing to pay a certain price for one product, their willingness to pay
for other items in the same produce category is judged relative to that first price (the
Anchors have an enduring effect for present prices as well as for future prices thus a
second anchor does not have an effect. Our first decisions resonate over a long sequence
of decisions! First impressions are important.
Behaviour herding: when we assume that something is good (or bad)) on the basis of
other peoples previous behaviour, and our own actions follow suit. PSYC 180 Lucy Luo
Self-herding: when we believe something is good (or bad) on the basis of our own
previous behaviour. (continuing to buy Starbucks coffee because you had before)
The power of the first decision can have such a long-lasting effect that it will percolate
into our future decisions for years to come. Thus, the first decision is crucial.
Demand is not a completely separate force from supply because the market anchors
prices on us and affects our willingness to pay.
The sensitivity we show to price changes might be largely a result of our memory for the
prices we have paid in the past and our desire for coherence with our past decision not a
reflection of our true preferences or our level of demand.
In many cases we make decisions in the marketplace that may not reflect how much
pleasure we can get from different items. Thus free-market mechanisms are not perfect.
Our attempts to make sure we end up with decisions that seem well-reasoned and
thoughtful, we commonly undergo a lot of unnecessary mental gymnastics and
justifications, particularly when the choices are large and significant.
Following our gut feelings and rationalizing them after the fact!
The Cost of Zero Cost
(Why we often pay too much when we pay nothing)
The critical issue arises when free becomes a struggle between a free item and another
item a struggle in which the presence of free leads us to make a bad decision.
Most transactions have an upside and a downside, but when something is free, we forget
We perceive what is being offered as more valuable than it really is humans are afraid
of loss. The Zero Price Effect the emotional surge of free.
Same effect for product exchange! E.g. candy on Halloween trading for bigger candy
with smaller candy, or getting a smaller candy free.
Zero calories works the same way.
The pain of paying the unpleasantness associated with giving up our hard-earned
cash, regardless of the circumstances. 2 features:
1. When we pay nothing, we dont feel any pain of paying
2. The pain of paying is relatively insensitive to the amount that we pay. (we feel
more pain of paying as the bill increases, but every additional dollar on the bill
pains us less diminishing sensitivity).PSYC 180 Lucy Luo
The Cost of Social Norms
(Why we are happy to do things, but not when we are paid to do them)
We live simultaneously in two different worlds one where social norms prevail, and the
other where market norms make the rules. Social norms: friendly requests. Instant
paybacks are not required. e.g. holding the door open. Market norms: you get what you
Many examples show that people will work more for a cause than for cash!
Once market norms enter our considerations, the social norms depart.
Small gifts keep us in the social exchange world and away from market norms nobody
gets offended by a small gift.
For market norms to emerge, it is sufficient to mention money. Market norms relate to
self-reliance, helping, and individualism.
Introducing market norms into social exchanges violates the social norms and hurts the
relationships. Once this mistake is committed, recovering a social relationship is difficult.
(when a social norm collides with a market norm, the social norm goes away for a long
Social norms build loyalty in corporations the workplace.