Behavioral Econ Midterm 2

Libertarian Paternalism

The ethical foundation of behavioral economics that involves steering people's choices in a welfare-promoting direction without eliminating their freedom to choose.

Choice Architects

The individuals or organizations who design the environment in which decisions are made.

Nudge

A manipulation that alters how a choice is presented without changing the actual options or restricting freedom.

Nudge Type: Pure Nudge

A nudge that relies entirely on psychology and framing, costing $0.

Nudge Type: Hybrid Nudge

A nudge that combines behavioral psychology with a small, salient economic incentive.

Choice Architecture Tool: Defaults

Setting the path of least resistance by pre-selecting the option that benefits the majority.

Choice Architecture Tool: Expect Error

Designing systems assuming humans will make mistakes (e.g., a car's low-fuel warning light).

Choice Architecture Tool: Understand Mapping

Helping users translate confusing numbers into real-world happiness or utility (e.g., RECAP for cell phone plans).

Choice Architecture Tool: Incentives

Ensuring any financial reward used to motivate a change in behavior is salient (prominent and noticeable).

Experimental Science: Independent Variable

The specific factor the researcher introduces or manipulates to see if it causes a change.

Experimental Science: Dependent Variable

The outcome, behavior, or result you are trying to measure and change.

Experimental Validity: Internal Validity

The extent to which an experiment accurately isolates the variable it claims to be testing without interference from hidden confounding factors.

Experimental Validity: External Validity

The extent to which the results of an experiment can be generalized to different populations, times, or settings.

Experimental Validity: Ecological Validity

How well the methods, materials, and setting of the experiment approximate the messy, real world.

Social Influence: Wisdom of the Crowd (Vox Populi)

The concept that a large, diverse, and independent group of people will mathematically average out to a highly accurate judgment.

Social Influence: Conformity

Our evolutionary drive to cooperate and avoid social exclusion, causing us to mimic the behaviors of those around us.

Social Influence: Priming

Subconscious social cues that increase the ease with which certain thoughts or behaviors come to mind.

Pluralistic Ignorance

A phenomenon where a majority of individuals privately reject a norm but publicly conform to it because they incorrectly assume everyone else accepts it.

Market Norms vs. Social Norms

Market norms are transactional and driven by cost-benefit analysis; social norms are relational and driven by empathy and reciprocity. (Note: Market norms immediately drive out social norms).

Prospect Theory

Kahneman and Tversky's model proving that humans do not calculate probability rationally, but instead convert objective statistical probabilities into subjective, emotional ones.

Reference Dependence

The concept that we evaluate outcomes as "gains" or "losses" relative to our current starting point, rather than based on absolute wealth.

Probability Weighting: Possibility Effect

How we massively overweight tiny probabilities (1-5%), making us risk-seeking for massive gains (lottery) and risk-averse for massive losses (insurance).

Probability Weighting: Certainty Effect

How we underweight near-certain probabilities (90-99%), making us risk-averse for near-certain gains (settling out of court) and risk-seeking for near-certain losses.

Risk (Known Unknowns)

Situations where the outcome is uncertain, but the exact mathematical probabilities of all possible outcomes are known.

Ambiguity (Unknown Unknowns)

Situations where not only is the outcome uncertain, but the odds of the outcomes are completely unknown and unmeasurable.

Ellsberg Paradox

An experiment proving human aversion to ambiguity; people prefer gambles with known odds over unknown odds, even if the math suggests otherwise.

Inter-temporal Choices

Decisions where the costs and the benefits occur at different points in time.

Inter-temporal Discounting: Exponential Discounting

The rational model of discounting the future at a steady, consistent percentage rate over time.

Inter-temporal Discounting: Hyperbolic Discounting

The irrational human reality of discounting heavily in the immediate short-term (impatience) but flattening out the discount rate for the distant future.

Inter-temporal Anomaly: Preference Reversal

Changing your choice simply because time has passed (e.g., impatient today, but patient when deciding for the distant future).

Inter-temporal Anomaly: Projection Bias

Falsely assuming your future self will have the exact same emotional or physiological state as your current self (e.g., grocery shopping while hungry).

Pre-commitment

A strategy where you make a binding decision in the present that actively restricts your choices or removes your flexibility in the future.

Pre-commitment Requirements

To be effective, the commitment must be credible (physically possible to execute) and costly (tangible penalty for breaking it).

Pre-commitment Strategy: Decision Points

Moments of friction where you are forced to consciously evaluate what you are doing; can be increased to stop bad habits or decreased to build good ones.

Pre-commitment Strategy: Partitions

Increasing decision points for negative options by breaking resources into smaller pieces (e.g., individual snack bags).

Record, Evaluate, and Compare Alternative Prices (RECAP)

A specific type of mapping tool that takes a user's past data (like cell phone usage) and applies it to complex pricing plans so they can easily see which option is best for them.

Lab Experiment

Conducted in highly controlled settings where the researcher artificially manipulates the data generating process to observe behavior.

Natural Experiments

Researchers simply observe naturally occurring phenomena in the real world without interfering or modifying the environment.

Field Experiment

A hybrid approach where the experiment occurs in a natural, real-world environment, but the researcher introduces a specific intervention to observe the effects.

Neuroscience Experiment

A specialized subset of lab experiments where subjects make decisions while wired to brain-scanning machines to observe physiological reactions to different stimuli.

Data Generating Process

The underlying mechanism or model that produces the behavior or variable you are measuring. Experiments try to capture a simplified version of this process.

Collective Conservatism

The bias where groups and societies change their habits and norms much slower than individuals do, resulting in a societal "status quo bias.”

Diversify and Avoid Regrets

The two ways of managing risk.

Risk, Temptation, and Ambiguity

The reasons why people discount: (1) The future is uncertain; you might die before getting the reward (2) Instant gratification provides immediate dopamine. (3) We cannot perfectly envision our future needs.

Inter-temporal Anomaly: Sequence Effect

Defying standard discounting by actually preferring to save the best experience for last, because anticipation provides its own utility.

Inter-temporal Anomaly: Dread

Defying standard discounting by wanting to experience physical or emotional pain immediately rather than delaying it, just to remove the psychological anxiety of waiting.