Class 4 (Risky Decision Making)
PART A
Read: Daniel Kahneman (2011). Thinking, Fast and Slow, Chapters 26-29, 32
The readings discuss how the framing of decision problems influences the choices we make, as well as how individuals (and firms on individuals) use mental accounting to influence their choices and happiness.
Preparation Questions:
1. What is loss aversion? In what ways are outcomes “short” of the reference point qualitatively different from outcomes “past” the reference point? What other reference points can you think of besides the status quo?
2. What is mental accounting and how does it differ from more rational stories of how people should make decisions? Can you think of any other implications besides those discussed in Chapter 32 of the Kahneman reading?
PART B
Read: David E. Bell, "The Toro Company S'No Risk Program", Harvard Business School Case (9-185-017). Available in your course package.
In 1983-84, Toro offered to refund the purchase price of a snowthrower if the snowfall in a customer's area was less than 20% of normal. Demand was much stronger as a result. Toro management needs to decide whether to renew the program for 1984-85.
Prep Note (Group Assignment):
The assignment is online. Please complete the survey here. Please submit one per group. The survey should be submitted by 8:30 on Thursday morning.
http://faculty.chicagobooth.edu/george.wu/surveys/xp4.html
The questions are repeated here for your convenience.
Question 1. Was the S'No Risk program a success? Rate the program on a 1 ("terrible") to 9 ("excellent") scale
Question 2. Provide a brief justification for your answer to Question 2.
Question 3. How does the S'No Risk program change the consumers' decision making process?
Question 4. Should Toro repeat the program? Yes or No
Question 5. Provide some reasons for your answer to Question 4.Optional Data Available: If you are interested, you can download 100 years of data on Boston and Kansas City snowfall. For Boston snowfall over the last 100 years, click here. For Kansas City snowfall over the last 100 years, download the following Excel file. Finally, data from the case in Excel spreadsheet form is available here.
- Dirk Olin (2003). "Crash Course: Prospect Theory", New York Times (June 8). This article is available here:http://query.nytimes.com/gst/fullpage.html?res=950DE0DD1130F93BA35755C0A9659C8B63
- Amos Tversky and Daniel Kahneman (1981). “The Framing of Decisions and the Psychology of Choice,” Science 211, 453-458. This article is available in your package and also here: http://links.jstor.org/sici?sici=0036-8075%2819810130%293%3A211%3A4481%3C453%3ATFODAT%3E2.0.CO%3B2-3 (You need to have a University IP or be using the proxy server or VPN to have access.)
- Richard H. Thaler (1999). “Mental accounting matters.” Journal of Behavioral Decision Making 12, 183-206. This article is available in your package and also here: http://dx.doi.org/10.1002/(SICI)1099-0771(199909)12:3<183::AID-BDM318>3.0.CO;2-F (You need to have a University IP or be using the proxy server or VPN to have access.)
- Roger Lowenstein (2001). "Exuberance is rational", New York Times Magazine (February 11). This article is available here: http://www.nytimes.com/library/magazine/home/20010211mag-econ.html
- Richard Larrick, George Wu, and Chip Heath (1999). "Raising the Bar on Goals", GSB Chicago. Available at: http://www.chicagobooth.edu/magazine/spring99/goals.html