Behavioral Economics

These flashcards cover key concepts from behavioral economics, including definitions, theories, biases, and principles.

Behavioral Economics

The study of psychology as it relates to the economic decision-making processes of individuals and institutions.

Rational Economic Decision-making

Making choices based on the aim of maximizing satisfaction or profits.

Rational Consumer Choice

A theoretical framework where consumers make decisions based on consistent preferences and attempt to maximize their utility.

Transitivity assumption

If a consumer prefers A to B and B to C, then they must prefer A to C.

Non-satiation assumption

Consumers will always benefit from more consumption of a good.

Perfect Information

The assumption that all economic agents have equal access to all information necessary for decision-making.

Information Asymmetries

A situation where different economic stakeholders have different levels of information regarding a transaction.

Utility

The satisfaction or benefit derived from consuming goods or services.

Marginal Utility

The additional satisfaction gained from consuming one more unit of a good.

Law of Diminishing Marginal Utility

As more of a good is consumed, the additional satisfaction from consuming each subsequent unit decreases.

Bounded Rationality

The idea that consumers' rationality is limited by the information they have.

Satisficing

Seeking a satisfactory outcome rather than the optimal one.

Bounded Selfishness

The concept that individuals do not always act solely in their own self-interest.

Altruism

The selfless concern for the well-being of others.

Nudge Theory

A principle that suggests subtle changes in context can influence decision-making without restricting choice.

Anchoring

The cognitive bias of relying heavily on the first piece of information encountered.

Framing

The way information is presented, which can significantly affect decision-making.

Loss Aversion

The tendency to prefer avoiding losses rather than acquiring equivalent gains.

Dual System Model

A framework outlining two modes of thought: fast and intuitive (System 1), versus slow and deliberate (System 2).

Choice Architecture

The design of the environments in which people make choices.

Default Choice

An option that is automatically selected if no alternative is chosen.

Restricted Choice

Limiting options available for decision-making.

Decision Fatigue

The deteriorating quality of decisions made by an individual after a long session of decision-making.

Social Norms

The accepted behaviors within a society or group.

Self-handicapping

Strategies used by individuals to excuse potential failure.

Expectation Bias

A tendency to see what one expects to see.

Herd Behavior

The tendency for individuals to follow the actions of a larger group.

Peak-End Rule

The psychological heuristic where people judge an experience largely based on how they felt at its peak and its end.

Regret Aversion

The tendency to avoid making decisions that may lead to regret.

IKEA Effect

The phenomenon where people place a disproportionately high value on products they partially created.

Pain of Payment

The negative feeling associated with spending money.

Temporal Discounting

The tendency to value immediate rewards more highly than future rewards.

Empathy Gap

The difficulty in predicting our emotional reactions to future events.

Zero Price Effect

The phenomenon where people place a disproportionately high value on things that are free.

Sunk Cost Fallacy

The tendency to continue a project or endeavor based on previously invested resources.

Availability Heuristic

Estimating the likelihood of events based on their availability in memory.

Nudge

A subtle policy shift that encourages people to make decisions that are in their broad self-interest.

Confirmation Bias

The tendency to search for, interpret, favor, and recall information that confirms one's preexisting beliefs.

Optimism Bias

The belief that one is less likely to experience a negative event compared to others.

Cognitive Bias

Systematic patterns of deviation from norm or rationality in judgment.

Behavioral Economics Principles

The foundations of behavioral economics that explain how psychological factors affect economic decisions.

Cognitive Dissonance

The mental discomfort experienced when holding two conflicting beliefs or values.

Market Share

The percentage of total sales in a market that is earned by a single firm.

Corporate Social Responsibility

A business model that encourages companies to operate in a way that enhances society.

Profit Maximization

Producing the level of output that yields the highest profit.

Growth Maximization

Focusing on growth in market share over profit.

Satisficing

Achieving a satisfactory level of performance across multiple objectives rather than one optimal outcome.