107 terms

Behavioral Economics Glossary (all) May 2013

For the Coursera MOOC
A cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions.
asymmetric dominance
The phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is inferior in all respects to one option; but, in comparison to the other option, it is inferior in some respects and superior in others. A higher percentage of consumers will prefer the dominating option than when the asymmetrically dominated option is absent. (starts with a)
choice architecture
Term describing how decisions can be influenced by how the choices are presented
cognitive bias
pattern of deviation in judgment whereby inferences of other people and situations may be drawn in an illogical fashion.
coherent arbitrariness
Preferences are initially malleable, but become imprinted, i.e. precisely defined and largely invariant, after the individual has made an initial decision (self-herding). Absolute valuation can be manipulated, but subjects do not change their preferences once established.
decoy effect
The phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is inferior in all respects to one option; but, in comparison to the other option, it is inferior in some respects and superior in others. A higher percentage of consumers will prefer the dominating option than when the asymmetrically dominated option is absent. Synonym: Asymmetric dominance.
expected utility
Theory of utility in which "betting preferences" of people with regard to uncertain outcomes (gambles) are represented by a function of the payouts (whether in money or other goods), the probabilities of occurrence, risk aversion, and the different utility of the same payout to people with different assets or personal preferences.
Herd behavior describes how individuals in a group can act together without planned direction.
Strategy using readily accessible, through loosely applicable, information to control problem solving in human beings and machines.
loss aversion
people's tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains. First convincingly demonstrated by Amos Tversky and Daniel Kahneman.
prospect theory
behavioral economic theory developed by Amos Tversky and Daniel Kahneman, describing the way people chose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that they evaluate these losses and gains using certain heuristics. The model is descriptive: it tries to model real-life choices, rather than optimal decisions.
status quo bias
Cognitive bias, irrational preference for the current state of affairs. The current baseline (or status quo) is taken as a reference point, and any change from that baseline is perceived as a loss.
law of diminishing returns
States that in all productive processes, adding more of one factor of production, while holding all others constant ("ceteris paribus"), will at some point yield lower per-unit returns.
impulsive purchasing
Behavior that is not regulated and that results from an unplanned spontaneous impulse. In particular, impulsive purchasing involves getting a sudden urge to buy something without advance intention or plan and then acting on that impulse without carefully or thoroughly considering whether the purchase is consistent with one's long range goals, ideals, resolves, and plans.
mental accounting
We assign money to mental categories. This assignment determines how we feel about the money. We treat unassigned money differently.
opportunity cost
What you are giving up by choosing one thing over another. Synonym: Shadow value of money.
3 components of the pain of paying
opportunity cost, hassle, moral tax
Shadow value of money
What you are giving up by choosing one thing over another. Synonym: Opportunity cost.
Consumer who experience minimal pain of payment and, therefore, ends up spending more than what he himself would consider as normatively appropriate (definition of Rick, Cryder, and Loewenstein). Opposite: Tightwad
Consumer whose affective reaction to spending may lead her to spend less than her more deliberative selves would prefer (definition of Rick, Cryder, and Loewenstein). Opposite: Spendthrift.
Vice product
A product that is often bought impulsively, even though consumers consider the products to be unhealthy and experience regret after the purchase. Opposite: Virtue product.
A self-deceptive disorder in which people who have sustained an injury to some part of their body deny the reality of their injury.
Automated process
Process taking place in the absence of effort, awareness, and intention and typically running to completion once initiated.
Categorization malleability
The availability of ways to categorize dishonest actions in more compatible terms and find rationalizations for them.
Cognitive load
The strain resulting from having to maintain two types of content simultaneously in working memory. Among the cues associated with cognitive load are pausing and simplified sentence structure. One of the cues of deception.
Controlled process
Process involving conscious effort, awareness, and intention, that can be stopped at will.
Descriptive norms
Norms specifying what most people do in a particular situation. To be distinguished from injunctive norms.
Fudge Factor
The amount of cheating you allow yourself before you start thinking of yourself as dishonest. The fudge factor shrinks when people are reminded of moral codes. It expands when the distance from money is increased (e.g. by using tokens) and when we see other people cheating.
Injunctive norms
Norms specifying the particular behaviors that most people approve or disapprove of. To be distinguished from descriptive norms.
Level of mutability of the stimulus
The level of mutability of the stimulus (e.g. information, object, circumstances) is the extent to which this stimulus is modifiable. Low mutability suggests that it is very difficult to imagine the situation had been different, while high mutability means that this is easy.
Licensing effect
The subconscious phenomenon whereby increased confidence and security in one's self-image or self-concept tends to make that individual worry less about the consequences of subsequent immoral behavior and, therefore, more likely to make immoral choices and act immorally. Synonym: self-licensing.
Macbeth effect
A threat to one's moral purity induces the need to cleanse oneself.
Telling lies to obtain sickness benefits.
Mental dualism
Mental process that ensures that the mental processes that are the target of self-deception do not have access to the same information as the mental processes deceiving the self. Types of dualisms: implicit versus explicit memory, implicit versus explicit attitudes, and automatic versus controlled processes.
Norm theory
Theory presented by Kahneman and Miller, postulating that norms are computed after the event has occurred rather than in advance. Specifically, they proposed that each stimulus selectively recruits its own alternatives and is interpreted in a rich context of remembered and constructed representations of what it could have been, might have been, or should have been.
Norm-focus theory
Social context determines whether people attend to descriptive or injunctive norms at a particular time and how these norms will impinge on an individual's immediate behavior.
Potential awareness
Situation in which the individual consciously knows the welcome information that has been gathered but also has some awareness that unwelcome information could be around the next corner.
Reflecting on their important values or past positive behaviors, people are reminded that they are moral and efficacious individuals, affirming their self-worth. A cornerstone of this theory is the idea that specific attacks on one's abilities or morals (e.g. failure on a test) do not need to be dealt with directly, but rather can be addressed at a more general level by restoring or reaffirming a global sense of self-worth.
an information-processing bias that gives priority to welcome over unwelcome information in a manner that reflect the individual's goals. Examples: biased information search strategies, biased interpretive processes, biased memory processes, rationalization and convincing the self that a lie is true (according to Von Hippel and Trivers).
The subconscious phenomenon whereby increased confidence and security in one's self-image or self-concept tends to make that individual worry less about the consequences of subsequent immoral behavior and, therefore, more likely to make immoral choices and act immorally. (also - licensing effect).
Accurately gauging one's abilities (reality-oriented).
Simple model of rational crime
States that whether people commit a crime or not is determined by a cost benefit analysis. The potential benefits are the amount to be gained, the potential costs are the risk of getting caught and the punishment. There is no morality involved.
Social identity theory
Theory according to which group members tend to use their own group to maintain or enhance a positive social identity and self-esteem, and as a consequence are motivated to conform with norms that provide them with an in-group identity, rather than an out-group one.
Social proof
Proof that someone from your group, from your background behaves in the same way.
Sunshine policy
Policy intended to achieve greater "transparency" and thereby reduce nepotism, corruption, collusion, cronyism, conflicts of interest, etc. It comes for a famous quote by Supreme Court Justice Louis Brandeis, "Sunshine is the best disinfectant", meaning that transparency will prevent dishonesty and conflicts of interest.
Situation in which, in an effort to control nonverbal signs of nervousness that might reveal deceptive intent, people try to control their face, trunk, and limbs. One of the cues of deception.
Symbolic self-completion
People are motivated to complete their self- definitions (e.g., musicians) when indicators or symbols of this definition are lacking (e.g., skills) by engaging in activities that complete the symbols (e.g., training). Thus, when moral self-definition is at stake, such as when one has indulged in morally questionable activities, one should naturally be motivated to engage in activities that will restore moral integrity.
Ultimatum bargaining game
proposer offers a division of a commodity (e.g., chips to be converted to money), and a responder can accept or reject the proposed division. If the responder accepts, the commodity is divided as proposed; if the responder rejects, neither party receives anything.
Authority ranking relationship (AR)
Relationship recognized by its clear superior-subordinate relationships (see Fiske's relational theory).
BDM Procedure
Becker-DeGroot-Marschak (1964) procedure, asking participants to make a bid on their product between 0 and 100 cents (pretesting revealed that no participant bid more than $1.00). A random number is then drawn between 0 and 100; if participants' number is equal to or above that number, they pay that amount and take their creation home, if their bid is below the number, they don't buy it.
Choking under pressure
Happens when increased motivation results in a decrement in performance.
Cognitive dissonance
The tension that results when there is a mismatch between our beliefs and our actions. We cannot change what we did but we can change what we believe, so that's what we do.
Communal sharing relationship (CS)
Relationship earmarked by High levels of cooperation and ''we-ness'' (see Fiske's relational theory).
The behavior in which animals offered the choice between eating food provided to them for free or working to get that food would eat the most food from the source that required effort.
Deterrence hypothesis
Prediction that the introduction of a penalty that leaves everything else unchanged will reduce the occurrence of the behavior subject to the fine.
Ability to successfully produce desired outcomes in one's environment.
Effort justification
The more effort people put into some pursuit, the more they come to value it.
Equality matching relationship (EM)
EM relationships lie somewhere between CS and AR relationships--they are very structured but exhibit equality. In EM relationships, everybody receives the same rewards, and reci- procity is monitored to ensure that the scales never get too far out of balance (see Fiske's relational theory).
Fiske's relational theory
Fiske's model posits four basic types of social relationships: communal sharing (CS), authority ranking (AR), equality matching (EM), and market pricing (MP) .
Idiosyncratic fit
The fact that a given solution fits your very personal needs very well.
IKEA effect
Labor alone can be sufficient to induce greater liking for the fruits of one's labor: Even constructing a standardized bureau, an arduous, solitary task, can lead people to overvalue their (often poorly constructed) creations. Named after IKEA, the Swedish manufacturer whose products typically arrive with some assembly required.
Market pricing relationship (MP)
Relationship involving ongoing cost-benefit analysis, and participants' payments for their labor are based on a wage rate that reflects the amount and quality of the work performed (see Fiske's relational theory).
"Not invented here" syndrome
Syndrome in which people, e.g. managers, refuse to use perfectly good ideas developed elsewhere in favor of their " sometimes inferior " internally-developed ideas.
Social facilitation paradigm
The tendency for people to do better on tasks when in the presence of other people. This works only if we are good at the task. If the task is novel, performance will be worse.
Sunk cost effect
The fact that people continue to devote resources to failing projects in which they have previously invested.
Toothbrush theory
We all need a toothbrush, we all want a toothbrush, but nobody wants to use anybody else's toothbrush. We want to create our own ideas and theories, but we don't want to rely on the ideas of others.
Yerkes-Dodson law
posits that there is an optimal level of arousal for executing tasks, and that departures from this level in either direction lead to a decrement in performance.
Action control theory
Self-regulation theory suggesting that after choosing a course of action, people focus on how to effectively implement the chosen course of action and disregard or downplay alternatives.
Adam-and-Eve problem
Would you sacrifice eternity in the garden of Eden for an apple? (No, but I would for knowledge of good and evil :-))
Binding behavior
The voluntary imposition of constraints (that are costly to overcome) on one's future choices in a strategic attempt to resist future temptations.
Bounded rationality
The idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision. It was proposed by Herbert A. Simon as an alternative basis for the mathematical modeling of decision making, as used in economics and related disciplines
Counteractive control
A variety of cognitive, affective, and motivational processes in order to counteract the influence of short-term costs and, thus, secure long-term outcomes when faced with a self-control dilemma in which short-term costs are in opposition to long-term outcomes (e.g. discomfort of medical checkup vs long-term health benefits).
Counteractive control theory (CCT)
Valenced short-term outcomes may elicit more intense self-control efforts that, in turn, act to increase the likelihood of choosing according to long-term outcomes.
Counterfactual thinking
The tendency people have to imagine alternatives to reality (what if...).
Descriptive theories
Simply model how people actually choose, often by stressing systematic departures from the normative theory.
Ego depletion
When we are continually exerting self-control, our ability to resist temptation weakens.
Hyperbolic time discounting
Immediately available rewards have a disproportionate effect on preferences relative to more delayed rewards, causing a time-inconsistent taste for immediate gratification.
Intertemporal discounting
The tendency of people to discount rewards as they approach a temporal horizon in the future or the past (i.e., become so distant in time that they cease to be valuable or to have additive effects). To put it another way, it is a tendency to give greater value to rewards as they move away from their temporal horizons and towards the "now".
Libertarian paternalism
A philosophy that advocates designing institutions that help people make better decisions but do not impinge on their freedom to choose. Automatic enrollment is a good example of libertarian paternalism.
Life cycle theory of saving
Households are assumed to want to smooth consumption over the life cycle and are expected to solve the relevant optimization problem in each period before deciding how much to consume and how much to save. Actual household behavior might differ from this optimal plan.
Normative theories
Characterize rational choice and are often derived by solving some kind of optimization prob- lem. The life cycle hypothesis is an example of a normative theory of saving since it is based on the solution to a lifetime consumption-smoothing problem.
scheme to encourage socially desirable outcome by making that outcome the default option, requiring no effortful self-control.
Personal decision
A situation where an individual can make a choice among two or more alternatives. This assumes that the individual recognizes that he or she has a choice and has control of this choice.
Prescriptive theories
Attempts to help people improve their decision making and become closer to the normative ideal. (these are often second best)
Present focus bias
The tendency to give more weight to our current environment or state.
Readily available alternatives
Alternatives that the decision maker would have known about and could have chosen without investing much time or money.
The comparison between where we are in life and where we could have been.
Regret or dissonance reduction processes
Attempts to justify engagement in a costly course of action. The greater the costs associated with a course of action, the greater the need to justify engaging in it.
Reward substitution
Using an alternate reward that is immediate and therefore more motivating. Reward substitution can get us to act like we care about the world while we really care about our image.
An umbrella construct that bridges concepts and measurements from different disciplines (e.g. impulsivity, conscientiousness, self-regulation, delay of gratification, inattention-hyperactivity, executive function, willpower, intertemporal choice).
Save More Tomorrow? (or SMarT)
Program to help people save more. The basic idea is to give workers the option of committing themselves now to increasing their savings rate later, each time they get a raise.
A crime reduction policy aimed at discouraging would-be offenders by making law-breaking require effortful planning (e.g. antitheft devices require more advance planning to steal a car).
Time-inconsistent preferences
Humans have a systematic tendency to switch towards "vices" (products or activities which are pleasant in the short term) from "virtues" (products or activities which are seen as valuable in the long term) as the moment of consumption approaches, even if this involves changing decisions made in advance. Consider having the choice between getting the day off work tomorrow or getting a day and a half off work one month from now. Suppose you would choose one day off tomorrow. Now suppose that you were asked to make that same choice ten years ago. That is, you were asked then whether you would prefer getting one day off in ten years or getting one and a half days off in ten years and one month. Suppose that then you would have taken the day and a half off. This would be a case of time inconsistency because your relative preferences for tomorrow versus one month from now would be different at two different points in time - namely now versus ten years ago. The decision made ten years ago indicates a preference for delayed gratification, but the decision made just before the fact indicates a preference for immediate pleasure.
Ulysses contract
Contract in which you know your future self will be tempted and you bind your current self to prevent your future self from misbehaving.
The positive and negative feelings that combine with reasoned analysis to guide our judgments, decisions, and actions; the sense (not necessarily conscious) that something is good or bad.
Dread risk
A low-probability, high-consequence event, such as the terrorist attack on September 11, 2001.
Dual-process theories of thinking
Theory that "people apprehend reality in two fundamentally different ways, one variously labeled intuitive, automatic, natural, nonverbal, narrative, and experiential, and the other analytical, deliberative, verbal, and rational (Epstein). Stanovich and West (2000) labeled these two modes of thinking System 1 and System 2. One of the characteristics of System 1, the experiential or intuitive system, is its affective basis. Although analysis (System 2) is certainly important in many decision-making circumstances, reliance on affect and emotion is generally a quicker, easier, and more efficient way to navigate in a complex, uncertain and sometimes dangerous world.
Hot-cold empathy gaps
Misjudgments that occur between different visceral states.
Identifiable victim effect
We care more about suffering when it is represented by one individual.
Intra-empathy gap
Our inability to make predictions about our future actions in an emotional state.
Projection bias
The tendency to overpredict the degree to which one's future tastes will resemble one's current tastes
Psychophysical function
Function characterizing our diminished sensitivity to a wide range of perceptual and cognitive entities--brightness, loudness, heaviness, and money--as their underlying magnitudes increase.
Psychophysical numbing
Diminished sensitivity to the value of life.
The feeling of emotions; the internal and subjective component of sense perceptions, arising from stimulation of the senses by phenomena.
Region beta-paradox
Intense hedonic states trigger psychological processes that are designed to attenuate them, and thus intense states may abate more quickly than mild states. Because people are unaware of these psychological processes, they may mistakenly expect intense states to last longer than mild ones. In Study 1, participants predicted that the more they initially disliked a transgressor, the longer their dislike would last. In Study 2, participants predicted that their dislike for a transgressor who hurt them a lot would last longer than their dislike for a transgressor who hurt them a little, but precisely the opposite was the case. In Study 3, participants predicted that their dislike for a transgressor who hurt them a lot would last longer than their dislike for a transgressor who hurt someone else a lot, but precisely the opposite was the case. These errors of prediction are discussed as instances of a more general phenomenon known as the region-beta paradox
Trolley problem
A thought experiment in ethics, first introduced by Philippa Foot in 1967. The general form of the problem is this: Person A can take an action which would benefit many people, but in doing so, person B would be unfairly harmed. Under what circumstances would it be morally just for Person A to violate Person B's rights in order to benefit the group?
Visceral factor
A wide range of negative emotions (anger, fear), drive states (hunger, thirst, sexual desire) and feeling states (pain) that grab people's attention and motivate them to engage in specific behaviors. Unlike preferences they can change desire rapidly because they are affected by changing internal bodily states and external stimuli. Can be modeled as 'state-dependent preferences' motivating people to engage in specific behaviors through the combined application of carrots and sticks.