Why do people sometimes behave predictably and yet they sometimes do things totally unexpectedly?
Monetary Value of Time
For example, the inability of people to be objective about the monetary value of time.
Prospect Theory
Another interesting concept is prospect theory (http://en.wikipedia.org/wiki/Prospect_theory) that works on potential losses and gains. I think I understood a bit more when I worked it out just now. Imagine a scenario when you buy insurance (numbers taken from Wikipedia's article). Let's say that you might lose $1000 (v=-1000) and the probability that you think you might lose, P1=0.01. Let's also say that the premium you need to pay is $15.
Therefore, you need to compare between paying a premium or losing it all if you don't pay a premium and something happens.
Utility = Probability * Value (Utility is a measure of how much enjoyment you get from making an economic choice a.k.a. "happiness" =) )
Hence, the utility associated with paying the insurance premium is
U(pay premium) = P(pay premium) * Value = 100% * (-$15) = -$15
The utility associated with not paying the insurance premium is
U(not insured) = P(perceived probability of total loss) * V(total loss) + P(perceived probability of no loss) * V(no loss)
= P1 * (-$1000) + (1 - P1) * (0) = 1% * -$1000 = -$10
Assuming that we are starting from a reference pt (0,0), hence, most people would pay the premium, because they think they will suffer less from paying the premium. This is because they over-emphasize the probability of suffering an accident (P1 = 0.01 might be too large a perceived chance).
Hence, people think to overemphasize small probabilities, hence overreacting to them, while underreacting to medium and large probabilities.
Further reading
Man, I caught myself making these errors in my thoughts everyday.. =p (http://bookoutlines.pbworks.com/Predictably-Irrational)
1. Relativity
2. The Fallacy of Supply and Demand
3. Zero cost?
4. The cost of social norms
5. Influence of arousal
6. Procrastination and Self-control (I am guilty)
7. The high price of ownership
8. The cost of having too many options
9. Expectations
10. The power of price on perceived quality
Marketing
Most people would find "service marketing" concepts useful. It's not that difficult.. much easier than the assignments =p
7Ps
Product - How to make your product wanted/needed/desirable?
Price - Pricing strategy
Place - Where people can buy your product
Promotion - What kind of promotional activities do you do? Advertising? Freebies?
People - The people servicing your customer
Process - What steps does your customer take to buy your product/service?
Physical evidence - The tangible part of your service
This provides a good basic framework for thinking through the marketing strategy. I used it before. Common sense and budget/resource restrictions apply =)
References
http://bookoutlines.pbworks.com/Predictably-Irrational
http://www.nichegeek.com/profiting_from_human_irrationality_10_must_read_books
P.S. I'm not sure what I was supposed to blog about for the previous 2 weeks. I thought some of the things I was reading were also relevant to what the class wants to read. Furthermore, I think my classmates probably covered most of the points I wanted to raise.
Hope Jace does not mind the year 4s asking him so many questions... we just think that he could use some guidance =) His attitude is great! His presentation was not bad.
If you spot any errors, please tell me. =)
(Hi, this is one of my interests, although I don't know much about it yet. I used to hate economics because I did not like the overly theoretical stuff taught in JC and I thought ceteris paribus was bullshit compared to reality. However, age has caused me to understand that creating a simplified model might be the key to understanding a complex phenomenon. Also, "Freaknomics" sparked my interest in econometrics.)
ceteris paribus was bullshit compared to reality
ReplyDeleteMost economic theories are pretty useful on their own. The problem with most economic theories is they are often premised on certain false assumptions. That said, economics provides useful frameworks and tools with which to understand the real world. You just have to keep in mind the assumptions.
I'm not sure what I was supposed to blog about for the previous 2 weeks.
Truthfully, it doesn't really matter what you blog each week as long as you write something that demonstrates that you have been exercising your brain. This entry will suffice for this week. :-)
Hmm.. I admit I did not understand the assumptions well enough then. I still don't completely understand them even now. I really like Freakonomics cause it was the first time I really saw the principles applied to reality. It was so enlightening.
ReplyDelete=p It's funny, I don't blog cause of this module, that would defeat the purpose of this blog..
Prof is a party organiser =) Haha..