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Effects of Categorization and social Influence on Decision Making Answer


It is well aware that individuals are social being who love to be surrounded by social groups. They like to interact with each other. In day to day life, we use cognitive process in understanding ourselves and others. It is known as social cognition process. As according to the social cognition process, an individual’s social behavior is not determined by the situation he or she is in. In fact, it is determined by the perception of the person. How he perceives it and reacts towards it. It affects our thinking, knowledge, and memory. The two main functions of cognitive process is perception and judgment. Perception is the process of selecting, organizing and interpreting or attaching meaning to the events happening in the environment through our five senses like sight, hear, taste, touch, and smell.It is the psychological process in which we perceive about other through their actions and interaction and make opinion about them. After perceiving the things, we use our knowledge, information and past experience in forming our opinion about ourselves and others who are in our surroundings. This is our cognitive process that helps us in forming the good and bad opinion and decision because sometimes, due to various reasons like cognitive dissonance, illusion of control, frequency, representatives, prior hypothesize, ego-defensiveness etc. leads the biasness and we make the wrong perception about us and others.

In general, categorization is a mental operation in which a brain classifies the objects and events on the basis of the same characteristics and traits in to one group. This categorization is based on the past knowledge and the theories. For example – personality of a person can split into two categories– introvert, and extrovert. The categorization influences the individual decision making through perception. This is based on impression formation that an individual perceives through his impression about the traits of the particular category and makes the decision making(Kihlstrom). For example – When we categories the personality into parts –introvert and extrovert, we form our opinion about the people as according to the trait of the category. Suppose we visit to a social gathering and we were aware that our one friend is introvert, we try to speak with him less because we are aware that he does not prefer to speak much because of his personality trait. Thus categorization helps us in understanding the people, the traits of the group or the category and it helps us in making our further decision. Beside it, categorization helps the doctors and psychiatrists to diagnosis their patient in better way and in prescribing the better treatment for them. Categorization is based on the theories which are done by the researchers. It is the result of their studies which comes after conducting the extensive results. But sometimes, it is also observed that there are high chances of stereotype error or biasness that influence the individual’s decision making(Kihlstrom). But it takes place when people have lack of knowledge about the group or the category and they make wrong opinion about the group. It further influence their decision making process and they make the faulty decisions.

Sometimes, the individual’s decision making is largely affected by others and it is known as social influence. It includes the direct and indirect influence both. Direct influence means when the decision of a person is largely influenced by the group decision making and indirect influence means when a person imagine how his friend or any relative will react in a particular decision and he always reacts in the same way. For example – if a group of the four people are asked to make their opinion about a particular topic. The group will follow the group decision making method to take decision. Individual member will ask to give their opinion and at last all the opinions are evaluated on the basis of its pros and cons and finally the best option is selected by the group members. But it is also found that group decision making affect the individual decision making and sometimes the individual member takes the decision under the pressure of the group irrespective of what he feels and thinks about the subject. In consumer buying habits, we can notice that people are influenced by the social interaction while making their purchasing. Suppose, a consumer wants to purchase the Television or fridge and he discuss the matter with his three or four friends and after listening their views about the brands and models of fridge, he would like to go for one which is suggested by the majority of his friends. It is the natural process that whenever we have high under social influence, our decision making approach is largely influenced by the group social group. But further the effects of social influence is largely depends on various individual and environment factors like emotional factors, educational and cultural factors (Loewenstein, 2000), past experience and the reliability of the individual on the social groups.

Thus after analyzing our cognitive process, social influence and categorization, we can say that all the social cognition plays a very important role in our life. Sometimes, we are able to judge others in the right way because we analyze the factors carefully and perceive the things accurately. But sometimes the cognitive bias misleads our decisions and creates misunderstanding about others. Like cognitive process, social influence and categorization is also helps us in making our decision. But it is always important to use our knowledge, information and past experience before making any opinion about us and others. Wrong perception can lead to the wrong judgment and wrong judgment can lead the wrong decision making. So we should ignore the importance of psychological process. In fact a good understanding helps us in perceiving the things in better way and can reduce the chances of biasness and error.



Loewenstein G, (2000). Emotions in Economic Theory and Economic Behavior. Am. Econ. Rev. 90. Pg. 426-432.

Kihlstrom J.F. An Introduction to Social Cognition. Retrieved on February 25th 2014 from



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Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years Answer

Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?


  Annual values Semi-annual Inputs
Years to Maturity 8 16
Coupon rate 10% 5%
Annual Payment $100 $50
Par value $1,000 $1,000
Going rate, rd 8.5% 4.25%
Value of bond = $1,084.59 $1,085.80

Since it is payable semiannually

So, Price of the bonds = $ 1085.80