Please enable JavaScript.
Coggle requires JavaScript to display documents.
32.Keeping Score and Decision-Making - Coggle Diagram
32.Keeping Score and Decision-Making
Mental Accounts
Individuals create mental accounts for different types of expenses or income.
These accounts affect decision-making and can lead to inconsistent choices.
Example:
Two sports fans, one pays for a match ticket, the other gets it for free. The first fan is more likely to risk the storm to attend.
Loss Aversion
People are more sensitive to losses than to equivalent gains.
Example:
A person is more motivated to avoid losing a small amount than to gain a larger amount.
Leads to irrational decisions such as throwing more money into a losing project to recover losses.
Regret Avoidance
Fear of regret causes people to make safer, conventional choices, avoiding risks.
This prevents advancements that may involve risk, like the development of antibiotics.
Example:
Avoiding risky decisions for fear of regret leads to suboptimal decision-making.
Bias of Mental Accounting
The mental accounts create a bias towards decisions that minimize perceived losses.
Leads to investing more in losing situations to "recover" losses instead of reallocating resources for greater gains.
Strategies to Overcome Bias
Don't dwell on past bad decisions.
Avoid overestimating future regret, as it often exceeds actual regret.
Mental Strategy:
Analyze future decisions in context with long-term consequences.
Key Effects of Mental Accounting
Risk Aversion:
Preference for small, sure wins over bigger, uncertain gains.
Loss Aversion:
The pain of loss outweighs the pleasure of an equivalent gain.
Regret Avoidance:
Fear of making wrong decisions leads to more conventional choices.
Real-World Applications
Investments:
Continuing to invest in a losing venture due to mental accounting biases.
Business:
A company might not increase prices due to fear of customer backlash (loss aversion).
Insurance:
People prefer to insure small risks rather than big uncertain losses.
Dealing with Mental Accounting
Advice from Kahneman:
Always ask yourself if this is the last time you’ll make a decision based on this random event.
Rationality:
Use a broader perspective in decision-making, considering the long-term impact and not just immediate rewards.