Mahdiazhari Austian
11206004
Assignment 1 – Market Failures
1. Most subjects would answer: C) Mr. Fry more likely to see the movie. They would think that
Mr. Munn would not want to pay to see the movie because he could have lost only extra $2 if he
bought the three-pack. So, spending $5 to see the movie while he could have only spent $2 extra
to see it seemed wasteful. Most participants would believe that Mr. Munn would be avoiding
waste by not paying the extra $5.
I believe that the rational answer is A) Equally likely. Firstly, we know that both Mr. Fry and Mr.
Munn are somewhat interested in seeing this movie. Secondly, the cost of them seeing the extra
movie is $5. Therefore, the costs and benefits are the same for these two gentlemen. Both Mr.
Munn and Mr. Fry both lose the same amount of money and gain the same amount of satisfaction
(because they are somewhat interested in the movie).
Most participants fall into the sunk-cost fallacy, they still take into account the fact that Mr.
Munn did not take the three-pack and have to pay extra $3 to watch the movie ($12 for three
movies in three-pack vs $15 for three movies without pack) compared to if he had gotten the
three-pack. While the situation being evaluated is that both Mr. Munn and Mr. Fry are interested
in seeing the movie and both did not have the three-pack.
2. The original loan officers are trapped in a sunk-cost fallacy. They know about the money
invested into the loan, therefore they would be committed to try and save the business at all costs
(continue a behavior as a result of previously invested resources). The consultants’
recommendation worked because assigning new officers would remove this fallacy. The new
officers assigned do not have a personal history of their involvement in the loan, therefore they
don’t have any attachments to the loan. As a result, they can make better decisions regarding the
loan, such as stopping the loan if it is a bad decision.
3. According to the principles of Rational Choice Theory, people would prefer to be Ms. B. If we
weigh the benefits by looking at the amount of money won, Ms. B won $150, while Ms. A only
won $100. Therefore, the most rational choice would be to choose to be Ms. B.
On the other hand, according to Behavioral Decision Studies, people would prefer to be Ms. A.
Because Ms. A’s story suggests that she is the special winner in the movie theater. Because there
are no one in Ms. A’s story who won more than her. While Ms. B won only $150, in comparison
to the woman in front of her, who won a much larger amount of $10,000.
This is an example of the framing effect. Ms. B’s story is presented in such a way that she
seemed to be having less of a win compared to Ms. A. Ms. B’s story suggests that she is only the
second winner. While if we compare it to Ms. A, Ms. B gained $50 more.
