Behavioural Decision Making - Lecture 1

Vocabulary practice flashcards covering foundational theories, risk attitudes, prospect theory, and experimental research methods from Lecture 1: Behavioural Decision Making.

Behavioural Decision Theory (BDT)

Studies how people actually make decisions.

Normative Theory

Explains how people should make rational decisions.

Descriptive Theory

Explains how people actually make decisions.

Nudge

Changes choice architecture to influence behaviour without restricting choices or significantly changing economic incentives.

Choice Architecture

The way choices are presented or organised.

Status Quo Bias

The tendency to stick with the current or default option.

Expected Value Theory (EVT)

A normative approach positing that rational decisions maximise expected objective monetary value.

Expected Value (EV)

The average monetary outcome expected from a decision.

Expected Value Formula

Probability times monetary outcome, across all outcomes: $EV = \sum [p \times X]$.

Law of Large Numbers

As repetitions increase, the average outcome approaches the expected value.

St. Petersburg Paradox

A gamble can have infinite expected monetary value, even though people are unwilling to pay much to play.

Expected Utility Theory (EUT)

A normative theory stating that rational decisions maximise expected subjective utility of final outcomes.

Expected Utility Formula

Probability times subjective utility, across all outcomes: $EU = \sum [p \times U(X)]$.

Utility

The subjective satisfaction or value of an outcome.

Total Utility

Total satisfaction from consumption.

Marginal Utility

Extra satisfaction from consuming one additional unit.

Diminishing Marginal Utility

Each additional unit provides less extra satisfaction.

Decision Utility

Satisfaction anticipated when making a decision.

Experienced Utility

Satisfaction actually experienced after a decision.

Risk Averse

Prefers certainty over a gamble with the same expected monetary value.

Risk Neutral

Is indifferent between options with the same expected monetary value.

Risk Seeking

Prefers a gamble over a certain outcome with the same expected monetary value.

Prospect Theory

A descriptive theory explaining how people evaluate risky choices, especially gains and losses relative to a reference point.

Prospect Theory Formula (Lecture Notation)

Decision weight times subjective value, across outcomes: $PT = \sum [\pi(p) \times V(X)]$.

Loss Aversion

Losses feel stronger than equivalent gains.

Framing Effect

Decisions change depending on how options are presented.

Gain Frame Pattern

An experimental or decision context where people are usually risk averse.

Loss Frame Pattern

An experimental or decision context where people are usually risk seeking.

Reference Dependence

Outcomes are evaluated relative to a reference point rather than only their final value.

Reference Point

The starting point against which gains and losses are evaluated.

Diminishing Sensitivity

Equal changes have a smaller psychological impact further away from the reference point.

Endowment Effect

People tend to value something more highly when they own it.

Correlation

Two variables are related, but one does not necessarily cause the other.

Causality

A change in one variable causes a change in another.

Independent Variable (IV)

The variable manipulated by the researcher.

Dependent Variable (DV)

The outcome measured by the researcher.

Random Allocation

Randomly assigning participants to experimental conditions to reduce bias.

Between-Subjects Design

Different participants experience different experimental conditions.

Within-Subjects Design

The same participants experience all experimental conditions.

Field Experiment

An experiment conducted in a natural, real-world setting.

Opt-in

People must actively choose to participate.

Opt-out

People participate by default unless they actively decline.