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Emotions & irrationalities

Emotions & irrationalities

Loss Aversion

“We strongly prefer to avoid losses over acquiring gains.”
Imagine you loose $100 and I happen to be the lucky guy finding it. Loss aversion tells us that – unfortunately – you became more unhappy than that I became happier… Nobel laureate Daniel Kahneman and his late friend Amos Tversky discovered that losses are roughly twice as powerful, psychologically, as gains.

Therefore: phrasing the same outcomes as though it’s a loss can have a bigger impact than phrasing the same outcome as a gain.

But there’s more magic to the loss aversion effect. The Prospect Theory of Kahneman and Tversky explains that

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Self-generation affect effect

“If we figured it out ourselves, we like it better”
The self-generation affect effect (or the ‘not invented here – bias’ as people like Dan Ariely phrase it) is the cognitive version of the physical labor-love effect. Not only does physical effort increase liking, it works just as fine for cognitive effort… We tend to like ideas and information better if it is generated by our own mind (instead of ideas that we read or hear from someone else). Even if people invest just a small amount of cognitive energy in an idea or solution, they like it much more

Affect Heuristic

“We decide differently depending on our emotional state”
The way we feel influences our decisions and their outcomes. When we are happy – for example – we are more likely to try new things. But if we are worried, we tend to make more conservative choices. Therefor our emotional response to a website, app or Facebook page alters our judgment.

Because of this dependence on our emotional state, we make different decisions based on the same set of facts. Overall, this – so called – affect heuristic is of influence in nearly every decision-making arena.

The affect heuristic is typically used while

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Fear Appeals

“We will fight threats, but only if we’re told how to defeat them”
A fear appeal is a persuasive message that scares someone with the intent to motivate him to act against the threat. But since we don’t like threats, we tend to deny them, or use other defense mechanisms in order to lower our fear. Therefore fear appeals -or ‘fear evoked persuasion’- is a technique that should be used rather delicately.

Multiple variables have been found to influence the effectiveness of fear appeals, such as perceived severity, individual characteristics and -more important -susceptibility. But also the intensity of the fear:

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Reflection Effect

“We are risk-averse when we have something to gain, but risk-seeking when we have something to lose”

The reflection effect explains that we have opposite ‘risk preferences’ for uncertain choices, depending on whether the outcomes is a possible gain or a loss. The effect shows that both the Ambiguity and Risk Aversion biases are right, but only in cases where we can gain something.

Conversely, when we stand to lose something, we strongly prefer to take risks that might mitigate the loss (and therefore display risk-seeking behavior). This risk-averse versus risk-seeking behavior is called the reflection effect.

This reflection effect was discovered

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Ambiguity Aversion

“We prefer options that are certain”
People tend to select options for which the probability of a favorable outcome is known (over an option for which the probability of a favorable outcome is unknown).

The ambiguity effect is relevant when a decision is affected by a lack of information, or “ambiguity”. The effect implies that we tend to select options for which the probability of a favorable outcome is highest. We simply have a reluctance to accept offers that are risky or uncertain.

Two remarks:

Over an initial range, women require no further compensation for the introduction of ambiguity whereas men do.
Curiosity increases

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Endowment effect

“When we own goods, we value them higher than when we don’t”
How we value items depends on whether or not it is ours. The effect (also known as ‘divestiture aversion’) is that when there are two identical products, we especially value the one we own.

In other words: we want more money if we sell a product, than what we are willing pay when buying it.
Scientific research example:
The prototypical studies into the endowment effect involve mugs and other equally priced products.

Imagine Nobel-prize winner Daniel Kahneman gives you such a mug. You say “thank you”. Daniel than asks you if you

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