Problems Concerning Framing Effects

(Most of these problems are based on experiments conducted by scientists interested in decision-making behavior. The instructions in italics are directed at you and tell you what is expected in your answer. The instructions within the various situations are those addressed to the experimental subjects. You are asked to speculate on how the subjects would react to the experiments and compare their reactions with the dictates of RCT.)

1. Compare the following two situations. According to the principles of Rational Choice Theory, how should people's answers differ between the two cases? According to Behavioral Decision Studies, what difference, if any, would you expect? Very briefly explain your answer.

Situation A: You are in a store about to buy a new video camera that costs $800. As you wait for the salesclerk, a friend comes by and tells you that an identical video camera is available five blocks away for $770. You know that the service and reliability of the other store are just as good as this one. Will you walk five blocks to the other store?

Situation B: You are in a store about to buy a new watch which will cost $70. As you wait for the salesclerk, a friend comes by and tells you that an identical watch is available five blocks away for $40. You know that the service and reliability of the other store are just as good as this one. Will you walk five blocks to the other store?

2. Using what you have learned so far about framing effects, comment on the following message sent out by a cable company to subscribers. What advice, if any, might you give the cable company? What advice, if any, would you give the consumers?

"It's not often you get good news instead of a bill, but we've got some for you. If you've heard all those rumors about your basic cable rate going up $10 or more a month, you can relax: it's not going to happen! The great news is the rate for basic cable is increasing only $2 a month."

3. Compare the following two situations. According to the principles of Rational Choice Theory, how should people evaluate the two cases? According to Behavioral Decision Studies, what would you expect at least some people to say? Very briefly explain your answer.

a) Ms. A is waiting in line at a movie theater. When she gets to the ticket window she is told that as the hundred thousandth customer of the theater, she has just won $100.

b) Ms. B is waiting in line at a different theater. The woman in front of her wins $10,000 for being the one millionth customer of the theater. Ms. B wins $150.

Who would you rather be, Ms. A or Ms. B?

4. Compare the following two decisions. Analyze each pair of options according to the principles of Rational Choice Theory. How should people's answers differ between the two cases? According to Behavioral Decision Studies, what would you expect? Very briefly explain your answer.

a) Imagine that I begin by giving you $400, but there is a slight penalty involved. You must choose one of the two penalty options:

Penalty Option 1: You must give me back $100.
Penalty Option 2: I will toss a fair coin. If it lands heads, you must give me back $200; if it lands tails, you may keep all of the money I gave you.

b) Now consider this variation. Imagine that this time I start out by giving you $200. I then offer you more, in the form of one of two options:

Option 1: I will give you an additional $100.
Option 2: I will toss a fair coin. If it lands heads, I will give you an additional $200; if it lands tails, I will give you no additional money.

5. Using Rational Choice Theory, calculate the overall expected utility of each of the following three pairs of options (six options in all). Based on what you know of Behavioral Decision Studies, which of each pair of options would you expect people to favor and why?

Situation I: Which of the following options do you prefer?

A. A sure win of $30
B. An 80% chance to win $45

Situation II: Consider the following two-stage game. In the first stage, there is a 75% chance to end the game without winning anything, and a 25% chance to move into the second stage. If you reach the second stage you have a choice between:

C. A sure win of $30
D. An 80% chance to win $45

Your choice must be made before the game starts, I.e., before the outcome of the first stage is known. Please indicate which of the above options you prefer, C or D.

Situation III: Which of the following options do you prefer?

E. A 25% chance to win $30
F. A 20% chance to win $45.