Economics and Personal Finance - Vocab Quiz 1

Behavioral Economics

psychology and economics blending to understand why some people make irrational decisions financially by studying emotion, bias, and social factors.

Cognitive Bias

unconscious error in thinking that affects the way a person understands events, facts, and other people, which is based on their own particular set of beliefs and experiences.

Sunk Costs

money, time, or effort that was already spent and cannot be recovered, making it irrelevant to future decisions.

Loss Aversion

the pain from a loss is psychologically more powerful than pleasure from an equivalent gain.

Sunk Cost Fallacy

reluctance to abandon a strategy because it has been heavily invested in, even if abandonment would be beneficial.

Endowment Effect

people value items that they own more than identical items they don’t, leading to them demanding more when they sell it than what they’d pay to buy it.

FOMO

fear of missing out; anxiety that an exciting event might be happening and the fear of missing it.

Herd Mentality

the tendency for an individual to adopt a crowd’s behaviors and beliefs that differ from their own to be a part of the group.

Confirmation Bias

the tendency to interpret new information as confirmation of one’s existing beliefs or theories.

Overconfidence Bias

individuals systematically overestimate their own abilities, knowledge, or the accuracy of their judgements compared to objective reality.

Hedonic Adaptation

the psychological process where humans quickly return to a relatively stable baseline level of happiness after experiencing significant positive or negatives life events.