Chapter 9 - Judgement and decision making

Anchoring: A cognitive bias where people rely too heavily on the first piece of information they encounter (the "anchor") when making decisions, even if the anchor is irrelevant to the decision at hand.

Availability Heuristic (or Availability Bias): A mental shortcut where people assess the probability of an event based on how easily examples come to mind. Events that are more easily remembered are perceived as more frequent or more likely to occur.

Base Rate Frequencies (or Prior Probabilities): The general, background probability of an event or characteristic occurring, regardless of specific details. People often ignore base rates in favor of more vivid, anecdotal information.

Conjunction Fallacy: A cognitive bias where people incorrectly believe that specific conditions are more probable than general ones, typically when a combination of events is perceived as more representative than a single event.

Decoy Effect: A cognitive bias in which people’s preference between two options is influenced by the introduction of a third, less attractive option, making one of the original options seem more desirable.

Deliberation-without-Attention Effect: A phenomenon where individuals make better decisions when they don’t actively focus on the decision-making process, typically after being distracted or allowing unconscious processes to work.

Descriptive Theories: Theories in decision-making that attempt to describe how people actually make decisions, often highlighting systematic biases and heuristics, rather than how they should ideally make decisions.

Endowment Effect: A cognitive bias where people assign greater value to things they own than to equivalent items they do not own, simply because they own them.

Expected Value: A calculation used in decision theory that represents the average outcome if a decision is repeated many times, factoring in both the probability and magnitude of each possible outcome.

Fast-and-Frugal Search Trees: Decision-making models that focus on making fast, efficient decisions with minimal information by using simple rules or cues, often relying on just one or two pieces of information.

Fluency Heuristic: A bias in which people tend to prefer information or options that are easier to process or recognize, often assuming that easier-to-process options are better or more trustworthy.

Framing: The way information is presented can significantly influence decisions and judgments. For instance, people may respond differently to the same information depending on whether it's framed as a loss or a gain.

Gambler’s Fallacy: A mistaken belief that future probabilities are influenced by past events, such as thinking that after several losses in a row, a win is "due" in games of chance.

Heuristics: Mental shortcuts or rules of thumb that simplify decision-making, often leading to faster judgments but also to systematic biases.

Hot-Hand Effect: A cognitive bias in which people believe that a person who has experienced success with a random event (like basketball shots) has a higher chance of continued success, despite the event being random.

Irrational Behavior: Actions or decisions that deviate from rational, logical thinking, often influenced by biases, emotions, or faulty heuristics.

Law of Small Size: A fallacy in which people incorrectly assume that small samples are representative of larger populations, leading to overconfidence in conclusions drawn from small or unrepresentative data.

Less-is-More Effect: A cognitive bias where having less information leads to better decision-making, especially in complex situations where too much information can overwhelm or confuse.

Loss Aversion: A principle from prospect theory suggesting that losses are psychologically more painful than equivalent gains are pleasurable, which leads individuals to avoid losses more strongly than seeking gains.

Negative Utility: A state in which a decision or outcome leads to a decrease in overall well-being or satisfaction, often associated with losses or undesirable outcomes.

Neuroeconomics: An interdisciplinary field that combines neuroscience, psychology, and economics to study how the brain makes economic decisions and how cognitive biases affect financial choices.

Neuromarketing: The use of neuroscience and psychological principles to understand consumer behavior, often using brain imaging or physiological responses to evaluate marketing strategies.

Normative Theories: Theoretical models in decision-making that describe how people should make decisions, based on logic and rationality, such as in expected utility theory.

One-Clever-Cue Heuristic: A decision-making strategy where people rely on a single, prominent cue or piece of information to make judgments, ignoring other potentially relevant information.

Optimal Defaults: Pre-set options or settings that are selected by default, which can influence people's decisions, as people are often more likely to stick with the default option.

Positive Utility: A state in which a decision or outcome leads to an increase in overall well-being or satisfaction, typically associated with gains or desirable outcomes.

Predictably Irrational: A concept in behavioral economics introduced by Dan Ariely, suggesting that people often behave irrationally in systematic and predictable ways, contrary to what traditional economic theory predicts.

Prospect Theory: A theory in behavioral economics that describes how people make decisions involving risk, emphasizing loss aversion and the tendency to overvalue small probabilities and undervalue large ones.

Psychological Bias: Systematic patterns of deviation from rationality or optimal decision-making, caused by cognitive, emotional, or social influences.

Rational Behavior: Decision-making based on logic, evidence, and consistent preferences, typically aimed at maximizing utility or achieving desired outcomes.

Rational Choice Theory: A framework for understanding human behavior in decision-making, assuming that individuals make choices by evaluating all available options and selecting the one that maximizes their benefit or utility.

Recognition Heuristic: A decision-making shortcut in which individuals choose the option they recognize over one they do not, assuming that recognized options are superior or more likely to be correct.

Representativeness Heuristic: A mental shortcut where people judge the probability of an event based on how similar it is to a prototype or stereotype, rather than on statistical probabilities.

Risk: The uncertainty about the outcomes of a decision, often quantified as the probability of different outcomes.

Risk Averse: A tendency to prefer outcomes with lower uncertainty, avoiding risk even if the potential for higher rewards exists.

Risk Seeking: A tendency to prefer taking risks in order to achieve higher potential rewards, often seen in situations involving potential gains.

Status Quo Bias: A cognitive bias that leads people to prefer the current state of affairs and resist changes, even when alternatives might offer better outcomes.

Subjective Value: The perceived worth of an object, decision, or outcome, which can vary from person to person based on individual preferences and circumstances.

Sunk Cost Effect: A phenomenon in which people continue an endeavor, or make irrational decisions, based on the amount of resources (time, money, effort) already invested, even if future costs outweigh benefits.

Take-the-Best-Cue Heuristic: A decision-making strategy where individuals rely on the best (most valid) cue available and ignore other cues, typically when making judgments in uncertain situations.

Tallying: A simple decision-making strategy where individuals weigh or count the number of positive and negative attributes associated with each option to make a choice.

Thinking Fast (or System 1): The intuitive, automatic, and quick mode of thinking that relies on heuristics and gut feelings, often used for routine or low-stakes decisions.

Thinking Slow (or System 2): The deliberate, effortful, and logical mode of thinking that requires conscious attention and reasoning, typically used for complex or important decisions.

Transaction Costs: The costs associated with making an economic exchange, including time, effort, and resources spent in negotiating, searching, or deciding.

Utility: The satisfaction or benefit derived from a particular choice or outcome, central to decision-making models like expected utility theory.

Willingness to Pay: The maximum amount a person is willing to spend to obtain a good or service, often used as a measure of the value they place on that good or service.

Zero Price Effect: The phenomenon where people perceive items as being disproportionately more valuable when they are offered for free, even if the item’s intrinsic value is low.