Chapter 9 - Judgement and decision making

Cognitive Psychology

Anchoring

A cognitive bias where people rely too heavily on the first piece of information they encounter when making decisions.

Availability Heuristic

A mental shortcut where people assess the probability of an event based on how easily examples come to mind.

Base Rate Frequencies

The general probability of an event occurring, regardless of specific details.

Conjunction Fallacy

A cognitive bias where people believe that specific conditions are more probable than general ones.

Decoy Effect

A cognitive bias where a third, less attractive option influences preferences between two options.

Deliberation-without-Attention Effect

A phenomenon where individuals make better decisions when they don't actively focus on the decision-making process.

Descriptive Theories

Theories that describe how people actually make decisions, highlighting biases and heuristics.

Endowment Effect

A cognitive bias where people assign greater value to things they own than to equivalent items they do not own.

Expected Value

A calculation in decision theory representing the average outcome if a decision is repeated many times.

Fluency Heuristic

A bias where people prefer information or options that are easier to process or recognize.

Framing

The way information is presented influences decisions and judgments.

Gambler’s Fallacy

The mistaken belief that future probabilities are influenced by past events.

Heuristics

Mental shortcuts or rules of thumb that simplify decision-making.

Hot-Hand Effect

The cognitive bias where people believe a successful random event will continue to be successful.

Irrational Behavior

Actions or decisions that deviate from rational, logical thinking.

Law of Small Size

The fallacy of assuming small samples are representative of larger populations.

Less-is-More Effect

A cognitive bias where having less information leads to better decision-making.

Loss Aversion

The principle that losses are psychologically more painful than equivalent gains are pleasurable.

Negative Utility

A state where a decision or outcome decreases overall well-being or satisfaction.

Neuroeconomics

An interdisciplinary field studying how the brain makes economic decisions.

Neuromarketing

Using neuroscience to understand consumer behavior and evaluate marketing strategies.

Normative Theories

Models in decision-making that describe how people should make decisions based on logic.

One-Clever-Cue Heuristic

A decision-making strategy where individuals rely on a single, prominent cue.

Optimal Defaults

Pre-set options that influence people's decisions, as they often stick with the default.

Positive Utility

A state where a decision or outcome increases overall well-being or satisfaction.

Predictably Irrational

The concept that people behave irrationally in systematic ways contrary to traditional economics.

Prospect Theory

A theory that describes how people make decisions involving risk, emphasizing loss aversion.

Psychological Bias

Systematic patterns of deviation from rational decision-making.

Rational Behavior

Decision-making based on logic, evidence, and consistent preferences.

Rational Choice Theory

A framework for understanding human decision-making by evaluating all options for maximum benefit.

Recognition Heuristic

A decision-making shortcut where individuals choose recognized options over unrecognized ones.

Representativeness Heuristic

A mental shortcut where probability judgments are based on similarity to prototypes.

Risk

The uncertainty about the outcomes of a decision.

Risk Averse

A tendency to prefer outcomes with lower uncertainty.

Risk Seeking

A tendency to prefer taking risks to achieve higher potential rewards.

Status Quo Bias

A cognitive bias that leads to a preference for the current state of affairs.

Subjective Value

The perceived worth of an object, which varies based on individual preferences.

Sunk Cost Effect

The phenomenon of continuing an endeavor based on already invested resources.

Take-the-Best-Cue Heuristic

A decision-making strategy relying on the best cue available while ignoring others.

Tallying

A decision-making strategy where individuals weigh positive and negative attributes.

Thinking Fast (or System 1)

The intuitive and automatic mode of thinking based on heuristics.

Thinking Slow (or System 2)

The deliberate and logical mode of thinking requiring conscious attention.

Transaction Costs

The costs involved in making an economic exchange.

Utility

The satisfaction or benefit derived from a particular choice.

Willingness to Pay

The maximum amount a person is willing to spend to obtain a good or service.

Zero Price Effect

The phenomenon where free items are perceived as disproportionately valuable.