Below are a handful of anomalies/phenomena you should know that are not described in your book. Each stems from Behavioral Economics and contradicts Rational Choice Theory.
Your task is this:
Research all 12 of the above Consumer Behavior anomalies. Keep notes containing the information you collect on each. Pay particular attention to not only their definitions, but their causes, ways to overcome them (if appropriate), major researcher(s) associated with them, and most importantly, know the subtle differences between them. You should acquire as much additional information as you see fit.
The basic understanding and some sources for the first five of the listed anomalies are as below:
Winner's Curse
The winner's curse is a tendency for the winning bid in an auction to exceed the intrinsic value or true worth of an item. Because of incomplete information, emotions or any other number of factors regarding the item being auctioned, bidders can have a difficult time determining the item's intrinsic value. As a result, the largest overestimation of an item's value ends up winning the auction.
(https://www.investopedia.com/terms/w/winnerscurse.asp; Anomalies: The Winner's Curse - Richard H. Thaler; The Journal of Economic Perspectives; Vol. 2, No. 1 (Winter, 1988), pp. 191-202)
Status quo bias
Status quo bias is evident when people prefer things to stay the same by doing nothing (see also inertia) or by sticking with a decision made previously (Samuelson, & Zeckhauser, 1988). This may happen even when only small transition costs are involved and the importance of the decision is great.
Samuelson and Zeckhauser note that status quo bias is consistent with loss aversion and that it could be psychologically explained by previously made commitments, sunk cost thinking, cognitive dissonance, a need to feel in control, and regret avoidance. The latter is based on Kahneman and Tversky’s observation that people feel greater regret for bad outcomes that result from new actions taken than for bad consequences that are the consequence of inaction (Kahneman & Tversky, 1982).
(source: Kahneman, D., & Tversky, A. (1982). The psychology of preference. Scientific American, 246, 160-173.)
A series of decision-making experiments show that individuals disproportionately stick with the status quo. Data on the selections of health plans and retirement programs by faculty members reveal that the status quo bias is substantial in important real decisions. Economics, psychology, and decision theory provide possible explanations for this bias. Applications are discussed ranging from marketing techniques to industrial organization, to the advance of science.
(source: Status Quo Bias in Decision Making WILLIAM SAMUELSON Boston University RICHARD ZECKHAUSER Harvard University)
Hyperbolic Discounting Definition
Hyperbolic discounting refers to the tendency for people to increasingly choose a smaller-sooner reward over a larger-later reward as the delay occurs sooner rather than later in time. When offered a larger reward in exchange for waiting a set amount of time, people act less impulsively (i.e., choose to wait) as the rewards happen further in the future. Put another way, people avoid waiting more as the wait nears the present time. Hyperbolic discounting has been applied to a wide range of phenomena. These include lapses in willpower, health outcomes, consumption choices over time, and personal finance decisions.
(http://www.behaviorlab.org/Papers/Hyperbolic.pdf)
Time discounting research, which investigates differences in the relative valuation placed on rewards (usually money or goods) at different points in time, by comparing its valuation at an earlier date with one for a later date (Frederick, Loewenstein, & O’Donoghue, 2002), shows that present rewards are weighted more heavily than future ones. Once rewards are very distant in time, they cease to be valuable. Delay discounting can be explained by impulsivity and a tendency for immediate gratification, and it is particularly evident for addictions such as nicotine (Bickel, Odum, & Madden, 1999). Hyperbolic discounting theory suggests that discounting is not time-consistent; it is neither linear nor occurs at a constant rate. It is usually studied by asking people questions such as “Would you rather receive £100 today or £120 a month from today?” or “Would you rather receive £100 a year from today or £120 a year and one month from today?” Results show that people are happier to wait an extra month for a larger reward when it is in the distant future. In hyperbolic discounting, values placed on rewards decrease very rapidly for small delay periods and then fall more slowly for longer delays (Laibson, 1997).
(Bickel, W., Odum, A., & Madden, G. (1999). Impulsivity and cigarette smoking: Delay discounting in current, never, and ex-smokers. Psychopharmacology, 146(4),447-454.
Frederick, S., Loewenstein, G., & O’Donoghue, T. (2002). Time discounting and time preference: A critical review. Journal of Economic Literature, 40, 351-401.
Laibson, D. (1997). Golden eggs and hyperbolic discounting. Quarterly Journal of Economics, 112, 443-477.)
COGNITIVE MISER
Cognitive miser is a social psychology theory that suggests that humans, valuing their mental processing resources, find different ways to save time and effort when negotiating the social world. The term cognitive miser was first used by Susan Fiske and Shelley Taylor in Social Cognition (1991).
(Compiled by World Heritage Encyclopedia™ licensed under CC BY-SA3.0;
http://self.gutenberg.org/articles/cognitive_miser
https://www.researchgate.net/publication/227596197_The_Cognitive-Miser_Response_Model_Testing_for_Intuitive_and_Deliberate_Reasoning)
This theory demonstrates that a loss is perceived as more significant, and thus more worthy of avoiding than an equivalent gain. In the hierarchy of choice architecture, a sure gain is preferred to a probable one, and a probable loss is preferred to a sure loss. Choices can also be worded in a way that highlights the positive or negative aspects of the same decision, and thus prompt the affect heuristic to come to the fore.
The framing effect has consistently proven to be one of the strongest biases in decision making. The ways in which framing can be used are nearly unlimited; from emotional appeals to social pressure to priming.
When a positive frame is presented people are more likely to avoid risks but will be risk-seeking when a negative frame is presented. Especially important to note is that the effect seems to increase with age, which is important when designing health and financial policies.
The framing effect, sometimes called framing bias or simply framing, is a type of cognitive bias where a person's decision is affected by the way the information about the decision is presented (framed).
In other words, framing refers to alternative representations of the same objective information that end up significantly altering a person's assumptions, models, and ultimate decisions about that information.
Most people will prefer an outcome that is presented in a positive light as opposed to a negative light, despite the same end in sight. For instance, a politician who employs an economic policy of increasing the employment rate (employment = positive) as opposed to decreasing the unemployment rate (unemployment = negative) may have more success simply because of framing the same issue in a different light.
All of what we just went over works in the world of risk management as well.
Examples
The framing effect is very important here as well.
For instance, a very simple example of the framing effect in investments can be the following:
A. We may gain 25% if we invest in stock X
B. We may lose 100% if we invest in stock X
(Source: https://thedecisionlab.com/bias/framing-effect/
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263-291.
Levin, I. P., Schneider, S. L., & Gaeth, G. J. (1998). All frames are not created equal: A typology and critical analysis of framing effects. Organizational Behavior and Human Decision Processes, 76, 149-188.)
Below are a handful of anomalies/phenomena you should know that are not described in your book....