# Sunk Cost Effect

Topics: Rationality, Bounded rationality, Choice Pages: 4 (882 words) Published: April 14, 2011
Definition of Anchoring Effect: Agents would make decisions based on adjacent arbitrary event or exposure. It is one kind of “representativeness” heuristic

Bounded rationality (heusistics) leading to preference reversal in the Prominence effect and response and Compatibility effect Agents use heuristics which, on average work, but sometimes it leads to inconsistent choices (preference reversal) in regards to the matching of prices/costs

Bounded rationality (heusistics) leading to preference reversal in the Evalubility of joint facts and Asymmetric dominance Evaluation of two alternatives can become more difficult if they are not presented jointly. Agents would have to rely on memory. Agents use heuristics, such as “you can judge a product by its cover,” which may fail sometimes resulting in preference reversal. In this case, if the two dictionaries are placed jointly, the agent would reverse his choice when they are presented apart.

Asymmetric dominance
“when neither of two options … dominates the other, introduction of an option that is asymmetrically dominated—dominated by one option but not the other—increases the probability of choosing the option that dominates the new option.” So, asymmetric dominance may lead to preference reversal in the following fashion: The agent prefers Y>X, but when Z is presented, where X>Z, the agent reverses his choice, i.e., start to prefer X>Y.

Ignoring small differences

People tend to overlook small differences and focus on big differences. Of course, according to the heuristic, people should do so. But on some occasions they over do it, leading to the apparent violation of the axiom of transitivity

Elimination by aspects heuristics

Example: If one is looking for a home, one would put all available homes in a few categories. Let us assume there are only two categories: school-proximity vs. work-proximity. Once one decides on one major feature, let us say school proximity, one can focus on the size...