We created this A-Z glossary of scientific terms pertaining to human behavior to help our customers understand the “knowing-doing gap”. If you do nothing more than glance through this list, you will gain a clear understanding why systems and processes developed purely from theoretical concepts fail to produce the desired result when implemented in the real world. Systems fail when leaders fail to account for human behavior in the design process! Don’t let that happen to your project or business. Behavioral economics is key to designing systems and processes that work.
“Action bias” is a term used to describe the tendency people have to take action in order to feel like they’re in control of a situation, even when doing nothing might be the better choice. This can happen when we feel pressure from others or when we’ve had bad experiences in the past. For example, a goalie might jump to one side during a penalty kick even though it’s statistically better to stay in the middle. This is because they feel like they have to do something to show they’re trying their best.
The “affect heuristic” is when we rely on our emotions and how we feel about something to make quick judgments, rather than thinking things through logically. For example, if we have a negative feeling towards nuclear power, we might focus more on the risks and less on the benefits when we’re under time pressure. This can affect how we make decisions about things like product innovations or pricing. It’s similar to other heuristics, like the availability heuristic, where we make judgments based on what comes to mind quickly.
“Altruism” is when people do things to help others without expecting anything in return. This could be volunteering, donating money to charity, or helping someone in an emergency. Even though it might not benefit them personally, they still choose to do it because they want to help others. This has been studied in experiments where people are asked to share rewards with others, and many choose to give some of the reward to others, not just keep it for themselves. Other related concepts include sacrificing for fairness or to uphold social preferences.
Ambiguity (uncertainty) aversion
Ambiguity aversion is when we prefer options with known risks over unknown risks. It’s like when you have to choose between two things, and one has risks that you know about and the other has risks that you don’t know about. Most of us tend to go for the one with the known risks. This tendency is called ambiguity aversion, and it can affect our decisions in many situations, like investing in the stock market or deciding on medical treatments. It’s important to consider all the information available to us, not just what we already know, to make the best decisions.
Anchoring is a sneaky mental shortcut that happens when the first piece of information you hear becomes your reference point for making decisions. Even if it’s totally random or unrelated to the decision, it can still influence your judgment. This happens a lot when we’re buying things or making estimates. For example, if you see a house that’s super expensive, it might make you think other houses are cheaper than they really are. Advertisers sometimes use this trick by putting limits or slogans to make you buy more than you intended.
Asymmetrically dominated choice
The asymmetrically dominated choice, also known as the decoy effect, is a phenomenon in which the presence of a third option can influence our decision-making process. When we are faced with two options, adding a third option that is less attractive and inferior to one of the original options can make that option more appealing. This can happen in various situations, such as when choosing between products or deciding which movie to watch. The decoy effect can be used by marketers to influence our choices by strategically presenting options that steer us towards their desired outcome.
The availability heuristic is a mental shortcut where we make judgments based on how easily we can remember an example or instance. For example, we might think a certain disease is common because we recently heard a lot about it in the news, even if it’s actually rare. This can also affect how we make decisions about buying products or investments. Basically, the more easily something comes to mind, the more likely we are to think it’s true or important.
Behavioral economics is a way of understanding how people make decisions about money and resources. It suggests that humans aren’t always completely rational when it comes to money, and that our behavior can be influenced by things like our emotions, social pressures, and limited self-control. This field looks at how people actually behave, rather than just how they “should” behave according to traditional economic theory.
Bias refers to a tendency or inclination towards a particular point of view or perspective. In the context of decision-making and judgment, bias can influence our perceptions, attitudes, and behaviors. There are many types of bias, including confirmation bias (seeking out information that confirms our beliefs), hindsight bias (thinking that we knew something was going to happen after it has happened), and availability bias (judging the likelihood of an event based on how easily it comes to mind). It’s important to be aware of our biases and try to evaluate situations objectively.
Bounded rationality is a way of saying that our thinking isn’t always perfectly logical or rational. We have limits to how much information we can process and how much time we have to make decisions. This idea challenges the idea that we always make decisions that are in our best self-interest, as traditional economics suggests. Bounded rationality is a key idea in behavioral economics, which looks at how real people actually make decisions in the world.
Bubble (as in Economic)
An economic bubble happens when the price of something, like stocks or houses, goes up way higher than it should be. This can happen because people get really excited and start buying a lot, even if the thing isn’t really worth that much. People can be influenced by things like stories and emotions, and they might not think about the real value of the investment. When the bubble bursts, the price drops suddenly and a lot of people lose money.
Business is an organization or enterprise that is engaged in commercial, industrial, or professional activities with the aim of generating revenue and earning a profit. It involves the production, buying and selling of goods or services to customers, clients, or other businesses. Business may take the form of a sole proprietorship, partnership, corporation, or other legal structure, and may operate in various sectors such as manufacturing, retail, finance, healthcare, and technology. The ultimate goal of any business is to create value for its stakeholders, including shareholders, employees, customers, and the community at large.
When it comes to evaluating the possibility of gains or losses, people’s emotions don’t follow a linear path. This means that a small increase in the chances of winning a prize (say, from 50% to 60%) doesn’t feel as exciting as a jump from 95% to 100%. We also tend to be more attracted to small possibilities than to moderate ones – that’s why gambling can be so alluring. Interestingly, studies show that people with gambling problems aren’t necessarily bad at assessing the probability of losing or being averse to losses, but they tend to be more willing to take risks and more drawn to the possibility of winning, even if the odds are slim.
Choice architecture refers to the way the context is designed to influence the choices people make. It’s like setting up a path for people to follow and nudging them in the right direction. For example, organizing healthy food at the front of a cafeteria line can encourage people to choose healthier options. This approach also includes other techniques such as defaults, framing, and decoy options. By strategically using these behavioral tools, choice architects can guide people towards making better decisions without taking away their freedom of choice.
Choice overload, or overchoice, is the feeling of struggling to choose between too many options when shopping or making a decision. It can lead to unhappiness, decision fatigue, and avoidance of making a decision altogether. Factors contributing to overchoice include the number of options, time constraints, and preference uncertainty. To counteract it, simplifying attributes or reducing the number of options may be helpful, but offering more choice in areas where people feel ignorant, like wine, can also be beneficial. Conversely, in areas where people feel knowledgeable, like soft drinks, fewer options may be better.
Chunking is a technique people use to make information easier to understand and remember. It involves reorganizing information into smaller groups or “chunks.” For example, splitting a phone number into three parts makes it easier to remember. Research suggests that humans can best recall seven plus or minus two units of information, and chunking is most effective when four to six chunks are created. However, people can learn to increase the size of chunks over time. In behavioral science, chunking is also used to break down processes or tasks into more manageable pieces, such as in UX design or mobile nudging in the banking sector.
A cognitive bias is a type of thinking error that can cause our judgments to deviate from what’s considered desirable or logical. These biases can be caused by mental shortcuts called heuristics, and they can be motivated or not. Some biases, like those caused by errors in processing information, don’t reflect a person’s motivation. Other biases, especially those that benefit us, are more motivated. However, it’s important to avoid seeing biases everywhere, as some may not actually be biases.
Cognitive dissonance is a term from social psychology that describes the uncomfortable feeling we get when we hold two conflicting ideas or beliefs at the same time. To reduce this tension, we may change our attitudes, beliefs, or actions. For example, smokers might convince themselves that the evidence linking smoking to cancer is not convincing, even though deep down they know it is. Researchers have used the concept of cognitive dissonance to try to change people’s behavior by making them aware of their actions and then encouraging them to publicly commit to changing them. This can be an effective way to bring about change.
Commitment is a powerful tool for achieving behavior change, such as in dieting or saving money. Essentially, commitments are promises we make to ourselves or others to do something specific. The more difficult it is to break a commitment, the more effective it tends to be. People are motivated to keep their commitments to maintain a positive self-image and to avoid reputational damage or cognitive dissonance. In fact, studies have shown that publicly committing to a behavior change can increase the likelihood of following through with it. For example, a hotel experiment found that guests who made a commitment to reuse towels at check-in and wore a “Friend of the Earth” lapel pin were 25% more likely to reuse their towels during their stay. Commitment is related to the behavior change technique of goal setting and the principle of reciprocity.
Confirmation bias is when people tend to search for, interpret, and remember information in a way that confirms their existing beliefs and ideas. It’s like having a filter that only lets in information that supports what you already think. This bias is not just limited to personal beliefs and opinions, but it can also affect how people approach scientific research and consumer decisions. For example, if you already have a favorite brand, you might only look for reviews that support your opinion and ignore any negative feedback. It’s important to be aware of confirmation bias and actively seek out different perspectives and evidence to avoid making biased judgments.
In behavioral economics, the control premium means that people are willing to give up some potential rewards in order to have control over their own outcomes. For example, if given a choice to bet on themselves or someone else answering a question correctly, people will often choose to bet on themselves even if it means potentially winning less money. This shows that people value having control over their own outcomes and are willing to sacrifice some potential rewards for it.
In the context of business or economics, culture refers to the shared values, beliefs, behaviors, and customs that shape the way individuals and groups within an organization interact with one another and approach their work. It is the collective identity of an organization, shaped by its history, traditions, and social norms. The culture of an organization can have a significant impact on its performance and success, influencing everything from its decision-making processes to its ability to attract and retain employees. It is a dynamic and evolving process that is passed down through generations of employees and adapted to changing circumstances and challenges.
Curse of knowledge
The curse of knowledge is when someone knows a lot about a topic and has a hard time understanding what it’s like for someone who doesn’t know as much. This can cause problems in things like setting prices or estimating how long it will take someone to do a task.
Here’s a fun example: imagine you know how to play a really popular song like “Happy Birthday” on the piano. You try to tap out the rhythm on a table and have someone guess what song it is. You might think it’s really easy to guess, but the person listening might not know the song at all and have a hard time guessing. This is because you, the “tapper,” have the curse of knowledge and can’t imagine what it’s like to not know the song as well as you do.
In economics or business, a cycle refers to a recurring pattern of events or activities that follow a certain sequence and occur over a specific period of time. These cycles can be related to various economic indicators, such as production, employment, and prices. Economic cycles are typically characterized by periods of expansion, peak, contraction, and trough, and they can be influenced by various factors, such as government policies, international trade, and consumer behavior. Understanding these cycles is important for businesses and policymakers to make informed decisions about investments, production, and economic policies.
Have you ever found yourself exhausted after making a lot of decisions? That’s because making decisions can be tough and requires effort, just like any other activity. Long periods of decision-making can lead to poor choices, and this is called decision fatigue. It’s like running a mental marathon and can leave you feeling drained. When you experience decision fatigue, it can be harder to make good choices, and you might find it more difficult to control your impulses. It’s important to take breaks and give your brain a chance to recharge, just like you would rest your muscles after a physical workout. Decision fatigue is closely related to other concepts, such as choice overload and ego depletion.
When we have to make a big decision, like buying a car, we usually break it down into smaller parts and make decisions step by step. This is called decision staging. We start by figuring out what information we need to make a choice, then we compare our options based on a few important factors, and finally we make our decision. People who help others make decisions, like car salespeople, can make the process easier by breaking it down into different stages. They can also guide us through each stage by helping us compare our options at different times in the decision-making process. This can help us make a better decision in the end.
Have you ever had trouble deciding between two options, only to find that adding a third option made the decision easier? This is called the decoy effect. It happens when people’s preferences for one option over another change after adding a third, similar but less attractive option. For example, if you had to choose between a fancy pen and $6 cash, you might pick the pen. But if a less fancy pen was added as a third option, you might choose the fancy pen because it seems like a better value compared to the less fancy pen. This effect is not just limited to consumer products, it can also be seen in employee selection, apartment choices, and even nudging people to get cancer screening.
Default options are like pre-set choices that automatically happen if someone doesn’t actively choose something else. For example, if you don’t choose a specific ringtone for your phone, it might automatically be set to a default one. Defaults are a powerful way to influence people’s decisions because they require no effort to accept. For example, many countries have made it so that people automatically contribute to their retirement savings, unless they actively choose not to. Another example is organ donation – some countries make it so that people are automatically registered as donors, unless they opt out. Defaults can be a helpful nudge when people are unsure about what to do, and can also be seen as a recommended course of action.
Delusion of competence (Dunning-Kruger effect)
The Dunning-Kruger effect is when someone doesn’t realize that they’re not good at something. They might think they’re great at it, but in reality, they’re not. This can cause problems in decision-making, like when a boss promotes a bad product or when a person thinks they’re good at singing but they’re not.
The dictator game is a type of experiment that tries to see if people will act in a kind and generous way. In the game, one person is given some money and gets to decide how much to give to someone else. Unlike other games, the person getting the money doesn’t get to choose whether to accept or not. Some people wonder if this game really shows how kind people are or if there’s something else going on.
Discounting or Time discounting
Discounting, or time discounting, is the tendency of people to value a reward less if it is delayed in time. This means that people are willing to wait less for larger rewards, and more for smaller rewards. For example, someone might choose to receive $50 now instead of waiting a month for $60.
Have you ever held onto a stock that was losing value instead of selling it? Or sold a stock that had made gains instead of keeping it? That’s called the disposition effect, and it’s a common behavior among investors. Basically, people tend to feel the pain of a loss more strongly than the pleasure of a gain, so they hold onto losing investments hoping they’ll turn around. At the same time, they tend to sell winning investments to lock in gains. It’s a result of our emotions and how we perceive risk and reward.
Diversification bias is when people choose a wide variety of items for future consumption, but when it comes time to actually use them, they only prefer a few. This happens because people often overestimate their need for diversity. Sequential choices usually lead to greater satisfaction because we get to choose based on our immediate preferences. For example, I might download a mix of music genres for my vacation but end up only listening to my favorite one. When people choose between “virtues” (like high-brow movies or healthy foods) and “vices” (like low-brow movies or indulgent foods), they usually choose more virtues in an attempt to balance out their indulgences.
Have you ever felt torn between your desire for immediate gratification and your long-term goals? That’s where the dual-self model comes in. This model recognizes that we have two “selves”: a patient, forward-thinking self and a myopic, impulsive self. These two selves can conflict when it comes to decisions like saving money. Researchers have tried to find ways to make people feel more connected to their future selves, like using virtual reality to show what they might look like in the future.
The dual-system theory is a way of understanding how our minds work. It suggests that we have two systems: System 1, which is quick and automatic, and System 2, which is slower and more deliberate. When we make decisions, System 1 often kicks in first and can lead us to use shortcuts or biases. Factors like being busy, distracted, or in a good mood can make System 1 more dominant, while important decisions or accountability can bring in System 2.
Efficient market hypothesis
The efficient market hypothesis is a theory that says the market price of a security accurately reflects its true value. This means that all available information is already incorporated into the market price. However, behavioral finance suggests that individual trading behavior can also affect prices, leading to anomalies like bubbles. In other words, people don’t always make perfectly rational decisions when buying and selling assets, which can create temporary distortions in the market.
Have you ever tried to resist the temptation of eating a piece of cake, only to later give in and eat the whole thing? That’s what ego depletion feels like. It’s a concept from psychology that says our ability to exercise self-control is like a muscle that can get tired and weakened. When we use a lot of self-control, like trying to resist a temptation, we can deplete our willpower and become less able to control our behavior later on. Studies have found that ego depletion can lead people to make impulsive decisions, like choosing candy over healthy snacks. However, some researchers now question whether this idea of “ego depletion” is really accurate.
Elimination-by-aspects is a nifty little trick that people use to make choices more manageable. Instead of trying to evaluate all options at once, decision makers gradually reduce the number of alternatives in a choice set by focusing on one aspect at a time. For example, when choosing a hotel, they may first eliminate all options with fewer than three stars, then further narrow down the list by looking at distance from the beach or guest reviews. Eventually, only one option remains. This approach can save time and effort, but it also runs the risk of overlooking important factors that were not considered early on..
(Hot-cold) Empathy gap
The hot-cold empathy gap refers to a cognitive bias where people underestimate how much their visceral states (like hunger, pain, or anger) can influence their behavior or preferences. This can lead to poor decision making, such as cancer patients choosing undesirable treatment options or smokers underestimating their risk of becoming addicted.
Have you ever noticed that you tend to value something more just because it belongs to you? That’s called the endowment effect. Even if the thing isn’t worth much to other people, you might think it’s really valuable just because it’s yours. This effect is especially strong for things that have personal meaning, like a family heirloom or a concert ticket from your favorite band.
The empathy gap refers to the tendency for people to underestimate how much their emotions and desires will change in response to future events or situations. For example, someone might say they would never cheat on a test, but when faced with the actual temptation in the moment, they may behave differently than they expected. This gap between prediction and behavior can be influenced by a variety of factors, such as time pressure, cognitive load, and emotional arousal. Understanding the empathy gap can help us better predict and regulate our own behavior.
Extrapolation bias refers to our tendency to assume that current trends and patterns will continue into the future indefinitely. In other words, we overestimate the future impact of current events or circumstances, without taking into account potential changes or disruptions. This bias can be seen in various contexts, such as financial forecasting or economic predictions, where people may assume that past trends will continue without considering the impact of new developments or shifts in the market. It can also lead to overconfidence and risky decision-making, as people may make decisions based on an incomplete or inaccurate view of the future.
Fairness is a concept in behavioral science that refers to our preference for equal outcomes. We don’t like it when things are unequal, and this tendency has been observed in various games and experiments. In economics, fairness has been studied in relation to prices and wages. Consumers tend to be more accepting of price increases that are a result of rising costs, rather than short-term growth in demand. Employers sometimes pay more than the minimum wage to encourage employees to reciprocate the fairness. However, perceived unfairness, such as excessive CEO compensation, can lead to reduced work morale.
Fast and frugal
When we make decisions, we often rely on our intuition and quick thinking. Fast and frugal decision-making is all about using shortcuts that are quick and effective. These shortcuts are based on our natural cognitive abilities like memory and perception. They work well when we have limited resources, like time or knowledge. The recognition heuristic is an example of this kind of thinking. It helps us make choices by picking the option that we recognize, even if we don’t know much about it. Overall, fast and frugal decision-making is a smart way to work with the limitations we have as humans.
Fear of Disappointment
This refers to the feeling of being let down or disappointed when something doesn’t go as expected. For example, if someone has a fear of disappointment when it comes to winning $10,000, they may not want to take a risk and try to win.
Fear of missing out
Have you ever felt like you’re missing out on something when scrolling through social media? That feeling of anxiety is called Fear of Missing Out, or FoMO. It’s the fear that others are having fun and exciting experiences that we’re not a part of. This fear drives us to constantly check our feeds and stay informed about what others are doing. It’s related to other biases, like regret aversion and loss aversion, which make us afraid of missing out on opportunities or experiences.
The framing effect is when the way we present a decision can change how attractive it seems. For example, if we talk about the benefits of a decision, it might seem more appealing than if we focus on the negative aspects. This idea comes from prospect theory, which looked at how we make choices based on losses and gains. Framing can be used in different ways, such as highlighting the risks or rewards of a decision or emphasizing different aspects of a message. It’s also important in political communication, where it can influence public opinions.
Have you ever heard someone say, “I can’t bet on that number, it just came up last round”? That’s an example of the gambler’s fallacy, a belief that independent events are somehow connected. Despite knowing that each round of a game of chance, like roulette or lottery, is completely unrelated, some people can’t help but feel that a certain number is less likely to come up again.
(Behavioral) Game theory
Game theory is a fancy way of modeling how people make decisions based on the actions of others. It’s like a game of chess, but with real-life scenarios and real people making the moves. In traditional game theory, the focus is on how people act in their own self-interest to maximize their gains. But in behavioral game theory, we take into account how people feel about what others are getting, how they think about the situation, and how they learn from their experiences. Some popular games include those that involve cooperation and fairness, like the ultimatum game, dictator game, and trust game.
Habits are those things we do almost automatically, without even thinking about them. They’re like routines we’ve learned through repetition, such as brushing our teeth before bed or checking our phone as soon as we wake up in the morning. Habits are formed through a type of learning called associative learning, where actions become linked to specific situations or events. Habits usually involve a cue, a behavior, and a reward. Once we’ve repeated a habit enough times, it becomes automatic and we may not even think about the reason behind it. Habits can be hard to break, and they can even lead to status quo bias, where we prefer things to stay the same rather than change.
The halo effect is a social psychology phenomenon where people’s perception of a person’s unrelated attributes is influenced by their overall evaluation of that person. For instance, a friendly person may be perceived to be attractive, while a cold person is not. This effect also applies in other areas, such as the “health halo” phenomenon in which people tend to choose high-calorie food items from restaurants claiming to be healthy.
Have you ever noticed how that new gadget you bought or the raise you received at work doesn’t seem to make you as happy as it did at first? That’s because of hedonic adaptation, also known as the “hedonic treadmill.” We get used to changes in our lives, and our happiness returns to a stable baseline. Even negative events like bereavement or disability eventually have less of an impact on our wellbeing. To maintain lasting happiness, it may be more effective to focus on repeated smaller positive experiences, like exercise or religious practices, rather than relying on major events.
Herd behavior refers to when people follow the crowd instead of making independent decisions. This can happen in various domains, including finance, politics, science, and popular culture. Factors that can increase herd behavior include fear, uncertainty, and a shared identity of decision makers. It’s important to be aware of herd behavior and make independent decisions based on reliable information.
A heuristic is a mental shortcut or rule of thumb that people use to make judgments or decisions quickly and efficiently, often without being aware of it. While heuristics can be useful in many situations, they can also lead to errors or biases in thinking, such as overconfidence, confirmation bias, or the availability heuristic. Some common heuristics include the representativeness heuristic, the availability heuristic, and the anchoring and adjustment heuristic.
This means that something is very likely to happen. For example, if there is a high probability of rain, it means it is very likely to rain.
Have you ever heard someone say “I knew it all along” after something has happened? That’s an example of hindsight bias. It’s when we think that we knew the outcome of an event all along, even if we didn’t actually predict it beforehand. This bias can lead to distorted judgments about the probability of an event’s occurrence, and can be a problem in legal decision-making, like in medical malpractice suits.
Homo economicus is basically a fancy way of describing the concept of “economic man” in economics. This theory assumes that people are solely motivated by self-interest and always make decisions that maximize their own benefits. However, this view has been criticized by many social scientists, including behavioral economists and psychologists. In reality, people’s decision-making processes are often influenced by factors like limited information, lack of self-control, and changing preferences. So, the concept of homo economicus doesn’t always accurately reflect how humans behave in the real world.
Honesty is essential for trust and reciprocity in both personal and business relationships. Research shows that honesty varies widely across countries and is positively linked with economic development. Cognitive biases and self-interest can lead to dishonest behavior, while social norms and reminders can promote honesty. Group membership can also influence honesty, with professional identities sometimes weakening honesty norms.
Hope of Large Gain
This refers to the feeling of excitement or anticipation when there is a possibility of winning something big. For example, if someone has a hope of large gain when it comes to winning $10,000, they may be willing to take a risk and try to win.
Hyperbolic discounting is a tendency to prefer immediate rewards over larger but delayed rewards. This type of discounting often leads to impulsive decision-making, such as choosing to spend money now rather than saving for the future. It can have negative effects on personal finance, health, and long-term goal attainment.
The IKEA effect is the tendency for people to place a higher value on products that they have personally made, even if the quality is comparable to expert-made products. This effect occurs because people feel a sense of accomplishment and pride in their creations, and it is not just limited to experienced do-it-yourselfers. However, if the product is dismantled, the effect disappears. This phenomenon is becoming increasingly relevant in a world where customization and co-production are more common.
Identity economics is the idea that our economic choices are influenced not only by monetary incentives but also by our sense of self or identity. This concept was introduced by Akerlof and Kranton in 2000, who expanded the standard utility function to include identity considerations. In the workplace, a worker’s self-image and ideal job performance can be powerful incentives, and organizational identification has been found to be directly related to employee performance. However, identity can also have negative implications, as demonstrated by the behavior of bankers whose professional identity was made salient.
Incentives are things that motivate people to take action. They can be intrinsic or extrinsic, such as money or social approval. Incentives can help encourage behavior change, like quitting smoking or exercising more. However, relying solely on monetary incentives can backfire and reduce performance. Intrinsic motives like the desire to reciprocate or avoid social disapproval are also important. In some cases, extrinsic incentives may spoil the reputational value of good deeds or negatively impact an agent’s perception of a task or their abilities.
Have you ever felt upset when you saw someone else receive a better reward or treatment than you did, even if you still received something good? That feeling of unfairness is called “inequity aversion.” It’s a common human trait where we prefer fairness and resist inequality.
However, sometimes our desire for fairness can work against us. For example, we may be willing to give up a reward to prevent someone else from receiving a better one. Researchers have also looked into how customers respond to exclusive price promotions and “pay what you want” pricing. Overall, understanding how people react to fairness and inequality can help us better design policies and strategies that promote positive outcomes.
Inertia refers to the tendency for people to stick with the status quo and resist change. This can be helpful in some situations, but it can also prevent people from making beneficial decisions. Behavioral nudges can be used to either work with or against inertia, depending on the situation. In social psychology, inertia can also refer to the persistence of attitudes and relationships.
Have you ever avoided checking your bank account balance when you know it might not be good news? Or maybe you’ve put off going to the doctor for fear of getting bad test results. These are examples of information avoidance, which is when people choose not to seek out knowledge that’s available to them. This can happen in many ways, from physically avoiding information to forgetting it on purpose. While avoiding information can sometimes have immediate benefits, like avoiding negative feelings, it can also be detrimental in the long run by depriving people of useful information for decision making. In some cases, information avoidance can even contribute to political polarization and media bias.
Intertemporal choice refers to how people decide between receiving rewards at different points in time. In economics and finance, intertemporal choices refer to decisions that involve trade-offs between costs and benefits that occur at different points in time, such as deciding between immediate consumption or saving for the future. Essentially, it’s about weighing the value of immediate gratification versus long-term benefits. Studies have shown that people tend to prioritize immediate rewards, sometimes to their own detriment. This tendency is often referred to as present bias, and it’s part of a larger concept called time discounting. Another interesting idea in this field is the dual-self model, which suggests that people have two selves – one that wants instant gratification and one that’s more focused on long-term planning.
The less-is-better effect refers to a phenomenon where people focus more on easy-to-evaluate attributes rather than important ones when objects are evaluated separately. However, when evaluated together, there is a preference reversal. For example, participants in a study preferred a dinner set with fewer intact pieces over one with more but broken pieces when evaluated separately, but preferred the set with more intact pieces when evaluated together.
Leverage in business can be viewed from the perspective of borrowed capital or performance and prioritization of tasks. High leverage activities are those that have a significant impact on the overall success of a business, and they should be prioritized over low leverage activities. By focusing on high leverage activities, a business can maximize its resources and achieve greater performance. Low leverage activities, on the other hand, may be necessary but do not have as significant an impact on the overall success of the business. By minimizing time and resources spent on low leverage activities, a business can free up resources to focus on high leverage activities and improve performance. Effective leverage management involves identifying and prioritizing high leverage activities and finding ways to streamline or delegate low leverage activities to minimize their impact on overall performance.
Have you ever done something good, and then felt like you deserved to do something bad? That’s the licensing effect, also called self-licensing or moral licensing. It’s when people allow themselves to do something immoral after doing something moral. This effect has been studied in various situations, including donations, cooperation, racial discrimination, and cheating. For example, research in Canada found that people who shopped in a green online store were more likely to lie and cheat in a subsequent task.
This means that people dislike losses more than equivalent gains, and are more willing to take risks to avoid a loss. For example, if someone is loss-averse, they may be more willing to take a risk to avoid losing $10,000 than to try to win $10,000.
It’s interesting to note that people’s cultural background may influence the degree to which they are averse to losses. So, while loss aversion is a universal phenomenon, its impact may vary depending on where you come from.
This means that something is not very likely to happen. For example, if there is a low probability of winning the lottery, it means it is not very likely to win.
Mental accounting is a psychological concept in which people treat money differently based on factors such as the money’s origin and intended use, rather than thinking of it as a single pool of funds. For example, people may allocate certain funds for bills, others for savings, and others for discretionary spending. This can lead to irrational financial decisions, such as spending more on a credit card than with cash or treating gains from investments as disposable “house money.” Mental accounting is important in understanding how people manage their finances and has implications for financial services and consumer behavior.
Have you ever eaten more than you intended to without even realizing it? That’s the result of mindless eating, which is when various cues in our environment subconsciously affect our food consumption. These cues can include serving sizes, packaging, and even the people around us. One example of perceptual bias in mindless eating is when people underestimate the calories in larger servings and serve themselves more when using bigger utensils, plates, or bowls. Behavioral food science researcher Brian Wansink was a prominent figure in this field, but has faced allegations of scientific misconduct and article retractions.
Money illusion is a tendency to think about money in nominal, rather than real terms. Essentially, we focus on the number rather than its actual value. For example, we might be excited about a 5% return on an investment, without taking into account the inflation rate that may eat into that return. This bias can lead us to make less optimal financial decisions. Irving Fisher coined the term in 1928, and it’s still relevant today.
Myopic loss aversion
Have you ever heard the saying “Can’t see the forest for the trees”? That’s kind of what myopic loss aversion is like in the world of investing. Basically, it means that some investors get too caught up in short-term losses and forget to look at the big picture. They might sell their investments too quickly after a small dip in value, without considering the potential for long-term gains. This can be caused by focusing too much on individual investments and not thinking about how they fit into the bigger picture of a portfolio. In fact, a study showed that people who check their investments too frequently tend to play it too safe and miss out on potentially better long-term gains.
Have you ever found yourself spreading your limited resources evenly across different options, even if some options are of lower quality? This tendency is known as “naive allocation”. For example, you may invest equal amounts of money across different investment options regardless of their quality. Another example is the diversification bias, where people prefer to spread out their consumption choices across a variety of goods. Decision makers can work with these tendencies by separating healthy food menu options into different categories and combining unhealthy options into one category. This can steer consumers toward choosing more healthy options and fewer unhealthy options.
A nudge is a small change in the way choices are presented that can influence people’s behavior in a positive way. It doesn’t take away any options or change economic incentives, and it should be easy and cheap to avoid. For example, placing fruit at eye level in a cafeteria is a nudge that can encourage people to choose healthier snacks. Default options, such as enrolling in a retirement plan automatically, are also effective nudges. Nudging can be more cost-effective than traditional approaches, but there are limits to its effectiveness and it’s important to test behavioral interventions before implementing them. Boosts are a complementary approach to nudges that help people make more informed choices.
Have you ever heard of the 1/N heuristic? It’s a decision-making shortcut where people assign equal weights to all possible options or cues. For instance, in the ultimatum game, players often divide the money equally between themselves. And in investing, people may divide their funds equally among different investment options. This approach is called “1/N” because it divides resources equally among “N” options. It’s a simple, but not always optimal, way of allocating resources.
This means that people often think that positive things are more likely to happen to them than negative things. For instance, we may believe that we won’t get sick or that we’ll be successful in our career. This bias can be influenced by factors such as our sense of control and our mood. It’s important to be aware of this bias so that we can make more realistic and informed decisions about our future.
The ostrich effect is a tendency to avoid negative or threatening information, just like an ostrich sticking its head in the sand to avoid danger. When people are faced with bad news or information that contradicts their beliefs or desires, they may choose to ignore it, deny it, or simply not seek it out. For example, a person might ignore health warnings about the dangers of smoking or refuse to check their bank account balance when they suspect they might have overspent. This avoidance behavior can have serious consequences, as it may lead people to make decisions that are harmful to themselves or others.
Have you ever been so confident in your abilities that you ended up making a mistake? That’s what the overconfidence effect is all about. It’s when people believe they know more or are more skilled than they actually are, leading them to make errors in judgment. One way to measure overconfidence is to ask people to rate their confidence in their answers on a test and then compare it to their actual score. Overconfidence can lead to a range of problems in various fields. For instance, entrepreneurs may enter a market despite low chances of success due to overconfidence. In investing, overconfidence has been linked to excessive risk-taking, concentrated portfolios, and overtrading. It’s also common for people to underestimate how long it will take them to complete a task, which is known as the planning fallacy.
The over-justification effect is a phenomenon that can happen when a person’s intrinsic motivation for an activity decreases after they receive an external reward for doing it. For example, if someone enjoys painting as a hobby, but then starts receiving money for their paintings, their enjoyment of painting may decrease over time. This effect can also happen in the workplace, where offering monetary rewards for tasks that employees previously found satisfying on their own can actually decrease their overall motivation to do the work. The over-justification effect highlights the importance of intrinsic motivation and finding ways to maintain it in the face of extrinsic rewards.
Pain of paying
Have you ever experienced that feeling of reluctance when you have to spend money? That’s the pain of paying! We tend to feel the pain of paying because we don’t like losing things, including our hard-earned money. This pain serves as a way to regulate our spending behavior and keep our finances in check. Interestingly, the pain of paying can be reduced when we make purchases using credit cards, since it’s less tangible and the depletion of our financial resources isn’t as visible. However, different personality types experience this pain differently, with tightwads feeling it more than spendthrifts. Marketers can use this information to create contexts that make spending less painful for consumers. This phenomenon is also related to mental accounting, which is the way we categorize and keep track of our finances.
Partitioning refers to the practice of physically dividing a resource into smaller units to reduce the rate of consumption. For instance, individually wrapped cookies or dividing money into several envelopes. This approach creates additional decision points for consumers, which serve as a psychological hurdle encouraging them to stop and think before consuming more. This psychological hurdle can lead to a decrease in the rate of consumption, as consumers are more mindful of their usage. Additionally, there is a psychological transgression cost associated with opening a partitioned pool of resources, such as feelings of guilt. Separate mental payment accounts, like envelopes with money, have been found to disrupt shopping momentum, which can occur after an initial purchase. This approach is related to the concept of mental accounting.
The peak-end rule suggests that when we remember a past experience, whether it was pleasant or unpleasant, we tend to focus on the most extreme point and the end of the episode rather than an average level of positive or negative feelings throughout the entire experience. This idea was developed from research showing that people’s evaluations of past experiences are based on a weighted average of “snapshots” of the experience, such as moments in a movie, rather than the actual duration of the experience. Additionally, studies have found that people are more likely to repeat a painful experience if it is followed by a slightly less painful one. This shows that how we remember an experience is more important than the actual experience itself. People’s memories also effect their judgments.
The planning fallacy is the tendency to underestimate the time and resources needed to complete a project. This happens because people overestimate their abilities and ignore the risks. One way to avoid this mistake is to use Reference Class Forecasting, which involves comparing the current project to similar projects to make more accurate estimates.
Possibility effect/certainty effect
The possibility effect refers to the phenomenon where people tend to overestimate the likelihood of rare or unlikely events happening, simply because they can imagine them happening. This effect can influence people’s decisions and behavior, leading to an overemphasis on unlikely events and potentially poor decision-making.
Precommitment is the act of committing to a specific future action or goal, usually at a particular time, in order to better motivate action and reduce procrastination. This behavioral device is frequently used to achieve positive change, such as staying healthy by going to the gym. The “Save More Tomorrow” program, which helps employees save more money, is an example of precommitment in action.
Preferences refer to the choices people make between different options based on their expected level of happiness, utility, or satisfaction. For example, a person may prefer pizza over sushi because they expect to be happier or more satisfied after eating pizza.
Preference reversal is when people’s choices between two options change depending on how the options are presented, even though rational choice theory predicts consistency. For example, a person might prefer Option A over Option B when presented together, but prefer Option B over Option A when they are presented separately. This effect is often seen in behavioral experiments and is related to framing effects.
Present bias is the tendency for people to prioritize immediate rewards over larger future rewards. This bias can cause people to make choices that may not be in their best long-term interest. For example, a person might choose to spend money on something they want now, rather than save it for something more important in the future.
The primacy effect, also known as the serial-position effect, is a phenomenon in memory recall where people are more likely to remember the first items in a list or sequence than the middle or last items. This effect is thought to occur because the initial items have more time and attention devoted to them during encoding and are more likely to be transferred into long-term memory. The primacy effect is often contrasted with the recency effect, which refers to a tendency to remember the last items in a list due to their still being held in short-term memory.
Conceptual priming is a process in psychology that involves exposing people to certain stimuli, such as words, to activate associated memories or attitudes. This can influence their performance on a subsequent task. For example, priming consumers with words representing prestigious retail brands can result in higher preference ratings for prestige product options. Conceptual priming is different from other types of priming that do not involve activating meanings, such as perceptual priming or affective priming. This technique has also become a promising approach in economics for studying the economic effects of social identity and social norms.
Procrastination is the act of delaying or postponing decisions, often due to self-control issues, inertia, or the complexity of the decision-making process. This behavior is sometimes referred to as myopic procrastination, as individuals tend to focus on short-term gains rather than long-term benefits. Nudging techniques, such as pre-commitment, can be used to help people overcome procrastination. Choice architects can also limit the time window for making decisions or emphasize the concept of satisficing, where individuals make decisions that are good enough, rather than seeking the best possible outcome.
Projection bias is a tendency in which people assume that their preferences or tastes will remain the same over time. This can happen due to temporary factors, such as hunger or weather, or long-term changes in preferences. For example, people may overestimate the positive impact of a promotion at work, underestimate the future selling price of an item, or not save enough for retirement due to not fully appreciating the effects of habit formation. Projection bias can also affect decisions in other areas, such as medical choices, gym attendance, catalog orders, and housing markets.
Prospect theory is a behavioral model that explains how people make decisions between options that involve risk and uncertainty, such as the probability of gaining or losing something. It proposes that people think in terms of potential gains and losses rather than final outcomes and that they weigh these outcomes differently based on their reference point. It also shows that people are more sensitive to losses than gains, meaning that they feel the pain of losing more than the pleasure of gaining something. The theory has important implications for fields such as economics and finance, as it can help explain why people make certain decisions in the face of risk and uncertainty.
Ratio bias is a tendency for people to have difficulty processing or making decisions based on proportions or ratios, as opposed to absolute numbers. This can lead to biases in decision-making, where people may prefer one option over another based on how the information is presented, rather than on the actual value or benefit of the options. This bias is thought to arise from the way our experiential system encodes information, as absolute numbers are more concrete and easier to process than ratios or percentages.
Reciprocity is a social norm where people respond to an action with an equivalent action. This norm can involve positive actions such as returning a favor or negative actions such as punishing negative behavior. Behavioral economists are interested in reciprocity because it doesn’t involve an economic exchange and has been studied through experimental games. Organizations also apply reciprocity norms in practice, such as charities including small gifts in solicitation letters or hospitals asking for donations from former patients. Reciprocity is also used as a social influence tool in the form of “reciprocal concessions” or the “door-in-the-face” technique. This occurs when a person makes an initial large request, followed by a smaller request if the initial request is denied, and the responder then feels obligated to agree to the conceded request.
Recency effect is when people remember things better that they saw or heard recently than things they experienced a long time ago. This can happen because the information is still fresh in their memory and hasn’t had time to fade away. It can affect how people make decisions and judgments based on the most recent information they have.
The recognition heuristic is a quick way of making decisions by relying on whether something is recognized or not. It is a useful strategy for when there is limited information available. In one study, people had to guess which city had a larger population, and most people based their guess on whether they recognized the name of the city. Surprisingly, people were often more accurate in guessing about something they knew very little about, rather than something they knew a lot about.
Reference dependence is an important idea in behavioral economics. It means that when people make decisions, they compare the outcomes to a reference point and then decide if it is a gain or loss. This applies to all decisions that involve risk and uncertainty. For example, when it comes to online privacy, people evaluate privacy notices relative to their current level of protection. If the notice is less protective, people tend to disclose more information, while if it is more protective, people tend to disclose less.
Regret aversion is when people are afraid that they will regret their decision later on. They may be worried about the consequences of making a mistake or not taking action. This is often studied in the context of health decisions, where people’s fear of regret can affect their choices about medical treatments. Research shows that anticipating regret is a stronger predictor of behavior than other negative emotions or evaluations of risk. Other related biases include loss aversion, status quo bias, sunk cost fallacy, fear of missing out, information avoidance, and action bias.
Regulatory focus theory
The regulatory focus theory suggests that motivation is driven by seeking pleasure or avoiding pain, with a distinction between a promotion focus (seeking achievement) and a prevention focus (seeking security). Messages presented as gains are more effective for promotion-focused individuals, while messages presented as losses are more effective for prevention-focused individuals. For example, advertising that emphasizes the benefits of a product is more effective for promotion-focused individuals, while advertising that highlights the consequences of not using a product is more effective for prevention-focused individuals.
The representativeness heuristic is when we judge the likelihood of something belonging to a particular category based on how much it resembles our mental image of that category. This can lead us to ignore important information, such as the actual probability of something belonging to that category.
The way we feel at the moment of making a decision can affect how we perceive risk. The risk-as-feelings theory suggests that emotions play an important role in decision-making under risk or uncertainty, beyond just being an outcome of a decision. Unlike other theories that suggest emotions help us decide, risk-as-feelings accounts for cases where emotions can cause us to make choices that are not objectively the best. For example, someone may choose not to fly even though statistics show it is a safe mode of transportation because they have a severe anxiety about air travel.
This means that someone is not willing to take risks in order to achieve a certain outcome, such as winning money. For example, someone who is risk-averse may not want to take a chance on winning $10,000 if they fear losing money.
This means that someone is willing to take risks in order to achieve a certain outcome, such as winning money. For example, someone who is risk-seeking may be more willing to take a chance on winning $10,000, even if the odds are low.
Satisficing means making decisions that are just “good enough” instead of striving for the best option. It’s a shortcut that people often use to avoid spending too much time and energy on decision-making. Instead of analyzing all the possible choices, they choose the first option that meets their minimum requirements. This approach is useful when there are time and resource constraints, and the consequences of the decision are not too severe. Choice architects can use this heuristic to help people who tend to procrastinate and have trouble making decisions.
The scarcity heuristic refers to the tendency of people to perceive an object or resource as more valuable when it is less available due to limited quantity or time. Scarcity appeals are often used in marketing to induce purchases, and limited quantity appeals are thought to be more effective than limited time appeals because they create a sense of competition among consumers. For example, an experiment using wristwatch advertisements found that consumers were willing to pay an additional 50% if the watch was advertised as scarce. The scarcity heuristic can also be used by choice architects to encourage people who procrastinate to make decisions.
Scarcity (psychology of)
Scarcity refers to a feeling of not having enough of something, which can affect a person’s mental bandwidth, or brainpower. This includes attention, cognition, and self-control, which are finite resources that can become reduced or depleted. The scarcity mindset can be particularly pronounced for people living in poverty, leading to limited focus that can be used productively but also inhibits problem-solving and reasoning abilities. Poverty-related worries and difficult trade-offs can also reduce cognitive capacity and lead to sacrificing future rewards for immediate needs, procrastination, and avoidance of negative emotions.
Self-control is a mental ability that helps individuals resist temptations and impulses to behave in certain ways or feel certain emotions. This ability is important for achieving goals and is part of the broader concept of self-regulation.
Self-delusion refers to the act of deceiving oneself or holding on to false beliefs despite evidence to the contrary. It involves distorting or ignoring reality to maintain a certain self-image or worldview. Self-delusion can lead to a range of negative consequences, including missed opportunities, interpersonal conflict, and decreased well-being. It is often difficult for individuals to recognize their own self-delusions and may require external feedback or intervention to overcome.
The serial-position effect is the tendency for people to remember items at the beginning (primacy effect) and end (recency effect) of a list more easily. This effect has been studied in psychology and social psychology, and can impact persuasion depending on the relevance or familiarity of the issue. It should not be confused with order effects in research, which refer to context effects produced by the order of items.
A “sludge” refers to a process that involves intentional friction or obstacles that make it difficult for people to achieve a desirable outcome. This is in contrast to a “nudge,” which uses subtle interventions to make it easier for people to make better choices. Sludges can be found in various areas of life, such as complex rebate processes, subscription cancellations that require a phone call, or long and complicated government forms. Even when a sludge is designed to encourage beneficial behavior, such as registering to vote or obtaining a driver’s license, it can impose excessive costs on individuals in terms of time, effort, and psychological stress.
Social norms are rules that signal appropriate behavior within a group of people. Normative feedback, which can be descriptive or injunctive, is often used in behavior change programs to encourage pro-environmental behavior. Descriptive feedback compares an individual’s behavior to what most people do, while injunctive feedback communicates approved or disapproved behavior. Injunctive feedback is more effective when an undesirable behavior is more prevalent than desirable behavior. Reciprocity and other social norms of exchange differ from market exchange norms.
The study of social preferences is relevant because it helps us understand why people make certain choices and behave in certain ways. Social preferences can impact economic decision-making, as individuals often make choices based not only on their own self-interest, but also on how their choices affect others. For example, a person may choose to donate to a charity because they value helping others (altruism), or they may choose to punish someone who has treated them unfairly (inequity aversion). Understanding social preferences can also be important for policymakers and organizations. For instance, incorporating social norms or fairness considerations into policies or marketing strategies may be more effective in promoting desired behaviors than traditional incentives or penalties. Overall, the study of social preferences can provide valuable insights into human behavior, decision-making, and the role of social norms and values in shaping economic and social outcomes.
Social proof refers to the phenomenon where people’s behavior is influenced by the actions of others. This influence can either be normative, where people conform to be accepted or liked, or informational, where people look to others for guidance on how to behave in ambiguous situations. Social proof is a form of informational influence, or descriptive norm, which can lead to herd behavior. It is sometimes referred to as a heuristic.
Studies have shown that social proof has a greater impact on people from collectivist cultures, who tend to place greater emphasis on group harmony and conformity, while consistency and commitment have a greater impact on people from individualist cultures, who value personal autonomy and independence.
Status quo bias
Status quo bias refers to the tendency of people to prefer things to remain unchanged and to stick with a decision that they have made previously, even when there are potential benefits to be gained by making a change. This bias can occur even when the costs associated with making a change are small, and even when the decision in question is important. For example, people may be more likely to stick with their current health insurance plan, even if a better plan is available, simply because they are used to their current plan and changing plans would require effort. This bias is often attributed to loss aversion, a need to feel in control, regret avoidance, and cognitive limitations. While status quo bias is often seen as irrational, it can be a rational strategy in situations where there is a lot of uncertainty or a high cost associated with gathering information and making a decision. For example, if someone is faced with too many options to choose from, they may be more likely to stick with the option they already have rather than spend time and effort evaluating all of the available alternatives.
Sunk cost fallacy
The sunk cost fallacy occurs when individuals continue with a behavior or activity because they have already invested resources such as time, money or effort into it, even if the costs outweigh the benefits. This bias is related to loss aversion and status quo bias and can be seen as a result of an ongoing commitment. An example of this is when individuals order too much food and overeat to “get their money’s worth” or attend a concert in a blizzard because they feel they have to due to the initial investment made. The extra costs incurred, such as inconvenience or time, are held in a different mental account than the one associated with the initial investment. Research has shown that rats, mice, and humans are all sensitive to sunk costs after they have made the decision to pursue a reward.
The dual-system theory proposes that human cognition and decision-making processes can be divided into two distinct systems: System 1 and System 2.
System 1 is a fast, automatic, intuitive and unconscious process that is involved in routine and effortless cognitive tasks, such as recognizing familiar faces, reading simple text, or driving on a familiar route. System 1 is also responsible for rapid, heuristic-based decision making, relying on mental shortcuts or rules of thumb, rather than extensive analysis of information.
System 2, on the other hand, is a slow, effortful, conscious, and deliberate process that is involved in complex and challenging cognitive tasks, such as solving mathematical problems, reading complex text, or making important decisions. System 2 requires sustained attention and mental effort and involves reasoning, analyzing, and evaluating information in a logical and systematic way.
The dual-system theory suggests that human behavior and decision-making result from the interaction of these two systems. System 1 may dominate in situations that require quick and automatic responses, while System 2 may be more dominant in situations that require careful consideration and analysis.
The take-the-best heuristic is a simple decision-making strategy used by individuals to choose between alternatives. It is a type of heuristic known as a one-reason decision rule, where judgments are based on a single “good” reason while ignoring other cues. When using this heuristic, decision-makers will select the option with the best attribute that discriminates most effectively between the options. For instance, airport customs officers may determine which passenger to search by selecting the best of various cues, such as airport of origin, nationality, or amount of luggage. In a study that investigated US presidential elections, voters’ perceptions of how candidates would handle a single issue, such as the state of the economy or foreign policy, were used as a take-the-best attribute by potential voters, and the model correctly predicted the winner of the popular vote in 97% of the predictions.
Take-the-first is a decision-making shortcut where the decision-maker selects the first option that comes to mind. This heuristic is based on fluency, meaning that the option that is recognized faster is given higher value. It is a fast and frugal approach that is useful when there are limitations to people’s ability to analyze information carefully. For instance, in a study on handball players, the first option that came to mind tended to be superior to later options or conditions where they had more time to analyze the situation.
Time (temporal) discounting
Temporal discounting refers to the tendency of individuals to value immediate rewards more highly than rewards that are available in the future. This tendency is often studied by comparing the perceived value of a reward at different points in time. The further in the future the reward is, the less valuable it is perceived to be. Hyperbolic discounting theory suggests that the rate at which people discount future rewards is not constant, but rather decreases more rapidly for shorter delays and more slowly for longer delays. For example, people may be willing to wait an extra month for a larger reward in the distant future, but not willing to wait the same amount of time for a smaller reward in the near future. This tendency for immediate gratification and impulsivity can have negative effects, particularly for individuals struggling with addiction, such as nicotine addiction. However, research has shown that certain techniques, such as priming future focus or mental simulation of future experiences, can help reduce the effects of temporal discounting. Additionally, interacting with visual representations of one’s future self has been found to be an effective way to reduce temporal discounting.
Preference transitivity is a key principle of rational choice theory which states that if A is preferred to B and B is preferred to C, then A must also be preferred to C. This principle is violated by intransitive preferences where C is preferred to A, indicating a possible System 1 decision-making process. Intransitive preferences can also be related to phenomena such as preference reversal and the decoy effect.
Trust is a fundamental aspect of human societies, playing a critical role in relationships, families, organizations, and politics. Interpersonal trust is a mental construct with implications for social functioning and economic behavior, as observed in trust games. Despite the belief that trusting strangers is illogical, trust and trustworthiness are common in societies and are linked to reciprocity in human relationships. Trust is studied in terms of underlying personality traits, social processes, and expectations. It is based on social preferences, such as a desire to avoid betrayal. Trust and trustworthiness increase when people are more socially connected but decrease when partners are from different social groups. People of high social status tend to elicit more trustworthiness from others. Trust reinforces trustworthy behavior, as shown in a study where people were more trustworthy when the threat of punishment was available but not used. However, paradoxically, most people, including CEOs, tend to use the threat of punishment, with CEOs using it less than others.
The trust game is a game where Player A decides how much of an initial endowment to give to Player B, with the hope of receiving at least the same amount back. The money given to Player B is multiplied by the experimenter and returned to Player B, who then decides how much to return to Player A. This game is about reciprocity and trust. The original experiment found that most first players sent money and some received a greater payback than the initial amount sent, contradicting standard economic assumptions. However, there have been questions raised about what the trust game actually measures.
The ultimatum game is a research experiment that challenges the traditional assumption of rationality. In the game, one player (the proposer) is given a sum of money and asked to divide it between themselves and another player (the responder). The responder can either accept or reject the proposal, with both players receiving nothing if it is rejected. Game theory predicts that the proposer will offer only a small amount, and the responder will accept it. However, in practice, many proposers offer a more generous amount, with some even offering an equal split. Some responders reject offers that they perceive as unfair, indicating a willingness to make a sacrifice for the sake of fairness. This phenomenon is known as inequity aversion. The ultimatum game is similar to other research experiments such as the dictator game and the trust game.
In economics, utility refers to the benefits or satisfaction consumers get from a good, and it can be measured based on their choices or preferences. Behavioral economists have studied different types of utility, including expected utility for uncertain outcomes, discounted utility for intertemporal choices (something that occurs over a period of time), experienced utility for actual experiences, remembered utility for past experiences, and social utility for concerns about fairness. Transaction utility considers the perceived quality of a deal, while procedural utility values the process that leads to outcomes.
Willingness to pay (WTP) / willingness to accept (WTA)
Willingness to accept (WTA) and willingness to pay (WTP) are measures used in economics to assess people’s preferences without relying on their actual choices between options. WTA is the minimum amount of financial compensation that someone would require to part with a good or endure something undesirable, such as pollution or crime. On the other hand, WTP is the maximum amount of money a person is willing to pay for a good or to avoid something undesirable. According to traditional economic theory, WTP should be consistent across decision contexts, and WTA should be close to WTP for a given good. However, behavioral economics has shown that WTP and WTA may vary depending on the context. For example, people may be willing to pay more for a beer purchased at a resort hotel than a rundown grocery store, depending on the scenario presented to them. Additionally, research has found that the average WTA for a good may exceed its WTP, indicating an endowment effect, where people value something more if they already own it. The WTA-to-WTP ratio is typically higher for goods that are not ordinary private market goods, such as health and safety, and public or non-market goods.
The winner’s curse is a phenomenon in which the winning bid in an auction exceeds the true value of the commodity being auctioned. This is often due to emotional and cognitive biases as well as incomplete information. Richard Thaler’s seminal paper on the topic revealed that even if bidders are risk averse, the winning bid will still exceed the value of the item. This deviation from rationality is an example of bounded rationality, which arises when people struggle with contingent reasoning on future events. The degree of uncertainty about the commodity’s value and the number of competing bidders are two factors that influence the incidence and magnitude of the winner’s curse. In an attempt to overcome this phenomenon, reducing the variance in feedback and increasing the correlation between choices and outcomes can significantly improve performance.
Zero price effect
The zero price effect is the idea that getting something for free has a greater psychological impact than just a low price. When something is offered for free, it is seen as having more value than when it is priced at even a very low cost. This effect is particularly strong for things that give us pleasure, like treats or entertainment. One reason for this effect is the affect heuristic, where options with no cost are seen more positively. This effect can be important for marketers and decision makers to consider when offering products or services.
Just because you want a specific outcome for your life or business doesn’t mean you’re actually ready to make it happen in reality. We have a self-assessment quiz to find out if this kind of work is suited for you
We are happy to have a conversation learn a bit about you and what you are looking for.
Click the button below to select an available time to meet on a Zoom call.