DDD555

Module 5 Discussion

Chapter 12 – Causality and Statistics

Chapter 13 – Illusions

The following table summarizes the common psychological pitfalls described in these two chapters, such as representativeness in Chapter 12 and overconfidence in Chapter 13.

1.Choose one of the psychological effects in the table above, and describe the example in detail of how the chosen psychological bias lead to faulty decisions.

2.You example can be taken from finance, politics, sports, or any other sources that you find interesting. Provide a link to the article if possible, and summarize it.

3.How would you improve the decision?

The initial post must be approximately 200-250 words

Discussion

Ke

Prospect Theory assumes individuals value loss and gains differently, even if the resulting amount is the same. When presented with risk of gains or risk of losses, individuals tend to be more risk loving when it comes to losses and less risk loving when it comes to gains. Loss aversion is the theory that people are more psychologically averse to losing money than they are to gaining money. Prospect Theory also assumes that an individuals utility from losses or gains are dependent on their reference point, that being the amount of money they started out with.

One concept of prospect theory I found interesting was path dependency. Under this concept an individual will not lose utility if they gain a certain amount of money and then lose it right away. However, if they hold onto that money long enough they will reset their reference point and this will affect how they feel on their losses.

I am sure this is something that happens in the stock market all of the time. My dad once worked for a tech start up and when they got bought out the stocks they all had went up really high. Some people cashed out right away and made a lot of money, but some people held onto the stocks with the hope that they would go up more. My dad fell somewhere in the middle but recalled the experience of one co worker who waited it out to the end and ended up with nothing. I can't imagine the loss in utility he felt after thinking he had made millions and ended up with nothing .

Ni

Perception bias is the tendency to form simplistic stereotypes and assumptions about certain groups of people. This means it can be very difficult to make an objective judgement about members of diverse groups. This is interesting is that almost every person engages in some type of perception bias.

This is an example I like to use that makes it hit a little more close to home than most of the text book examples I've seen. If someone asks you where youre from and you say Bridgeport, or Granby, or Minnesota, or wherever, and they reply "are you one of THOSE people from ________" Immediately you would think of a profile of who "those people" are from your home town state or country. To make it more broad, what would you immediately think if someone said "are you one of those Americans?" You would think of whatever profile you have for a negative stereotype from America. You could probably even do it for the highschool you went to or college or whatever. It just goes to show how often we form schemas that bias our perceptions.

In finance this would also come into play for what to invest in. I for one was raised religious but no longer practice, I have bought a lot of stock in Aurora Cannabis, but never even thought about buying stocks in religiously affiliated organizations. Not to say that I wouldnt, it just never occurred to me until just now. I buy stocks in things Im interested in and eschew stocks that I dont find interesting. This is a form of perception bias less so because I actively stay away from them but that some negative connotation in my mind prefers to disassociate with it.

The reply post must be approximately 50-75 words