Exercises

Exercise 1
• Half of you have chocolates; other half gets to decide
whether or not to buy them
• Both sides state a price (maximum buying price or minimum
selling price) in rupees
• Sellers:
• For any price you state, you might have to sell the chocolate
for that price or a higher price
• Buyers:
• For any price you state, you might have to pay that price or a
lower price to buy the chocolate
 Pitfalls in assigning value
• Chocolate (~Exercise 1)
• Mean (median) price for sellers: $8.20 ($3.00)
• Mean (median) price for buyers: $3.02 ($1.10)

• This is an example of loss aversion

• The tendency to assign more weight to “losses” relative to
comparable “gains”
• Inconsistent with the notion of underlying value
• Examples/Implications:
• Mugs experiments ($5.25 vs. $2.50)
• Willingness-to-pay vs. willingness-to accept in environmental and
health safety surveys
Exercise 1 (MBA’s)
• Imagine that you were given a voucher for an all-
expense paid one-week vacation for two to your
favorite location (think of the specific location). What
is the lowest price for which you would sell this
voucher?
• Average = $6792 Median = $4000

• Imagine that you have option to purchase a voucher

for an all-expense paid one-week vacation for two to
your favorite location (think of the specific location).
What is the highest price that you would pay for this
gift certificate?
• Average = $2875 Median = $2500
Value of wireless connectivity
• Suppose you had arrived at a university identical to IIT,
except there was no campus wireless connection.
Given the opportunity, how much more in tuition or
fees would you be willing to pay to have it added?

• Now, suppose administration at IIT is considering

whether to do away with the campus wireless
connection. By how much would they have to lower
your tuition or fees to make it ok to do so?
 Pitfalls in assigning value
• Loss aversion can significantly impact how you assign value (and therefore
the choices you make)
• But it can also allow you to understand (exploit) the choices of others
• If you are aware that others are loss averse, you can better predict their decisions
• You can manipulate others’ choices by presenting a decision as a gain or loss
• Loss aversion also produces status quo bias
• New Jersey vs. Pennsylvania insurance example