Behavioral Science Concepts

>>Behavioral Science Concepts
Behavioral Science Concepts2018-07-05T15:56:51+00:00

Action bias

Some core ideas in behavioral economics focus on people’s propensity to do nothing, as evident in default bias and status quo bias. Inaction may be due to a number of factors, including inertia or anticipated regret. However, sometimes people have an impulse to act in order to gain a sense of control over a situation and eliminate...

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Affect heuristic

The affect heuristic represents a reliance on good or bad feelings experienced in relation to a stimulus. Affect-based evaluations are quick, automatic, and rooted in experiential thought that is activated prior to reflective judgments (see dual-system theory) (Slovic, Finucane, Peters, & MacGregor, 2002). For example, experiential judgments are evident when people are influenced by risks...

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Altruism

According to neoclassical economics, rational beings do whatever they need to in order to maximize their own wealth. However, when people make sacrifices to benefit others without expecting a personal reward, they are thought to behave altruistically (Rushton, 1984). Common applications of this pro-social behavior include volunteering, philanthropy, and helping others in emergencies (Piliavin &...

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Ambiguity (uncertainty) aversion

Ambiguity aversion, or uncertainty aversion, is the tendency to favor the known over the unknown, including known risks over unknown risks. For example, when choosing between two bets, we are more likely to choose the bet for which we know the odds, even if the odds are poor, than the one for which we don’t...

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Anchoring (heuristic)

Anchoring is a particular form of priming effect whereby initial exposure to a number serves as a reference point and influences subsequent judgments about value. The process usually occurs without our awareness (Tversky & Kahneman, 1974). One experiment asked participants to write down the last three digits of their phone number multiplied by one thousand...

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Availability heuristic

Availability is a heuristic whereby people make judgments about the likelihood of an event based on how easily an example, instance, or case comes to mind. For example, investors may judge the quality of an investment based on information that was recently in the news, ignoring other relevant facts (Tversky & Kahneman, 1974). Similarly, it...

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Behavioral economics

The field of behavioral economics studies and describes economic decision-making. According to its theories, actual human behavior is less rational, stable, and selfish than traditional normative theory suggests (see also homo economicus), due to bounded rationality, limited self-control, and social preferences. To find out more about behavioral economics, please download the Behavioral Economics Guide, read our Introduction...

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Bounded rationality

Bounded rationality is a concept proposed by Herbert Simon that challenges the notion of human rationality as implied by the concept of homo economicus. Rationality is bounded because there are limits to our thinking capacity, available information, and time (Simon, 1982). Bounded rationality is similar to the social-psychological concept that describes people as “cognitive misers”...

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(Economic) Bubble

Economic (or asset) bubbles form when prices are driven much higher than their intrinsic value (see also efficient market hypothesis). Well-known examples of bubbles include the US Dot-com stock market bubble of the late 1990s and housing bubble of the mid-2000s. According to Robert Shiller (2015), who warned of both of these events, speculative bubbles...

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Certainty/possibility effects

Changes in the probability of gains or losses do not affect people’s subjective evaluations in linear terms (see also prospect theory and zero price effect) (Tversky & Kahneman, 1981). For example, a move from a 50% to a 60% chance of winning a prize has a smaller emotional impact than a move from a 95%...

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Choice architecture

This term was coined by Thaler and Sunstein (2008) and refers to the practice of influencing choice by changing the manner in which options are presented to people. For example, this can be done by setting defaults, framing, or adding decoy options. Thaler, R. H., & Sunstein, C. (2008). Nudge: Improving decisions about health, wealth,...

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Choice overload

Also referred to as ‘overchoice’, the phenomenon of choice overload occurs as a result of too many choices being available to consumers. Choice overload may refer to either choice attributes or alternatives. The application of heuristics in decision making becomes more likely with a greater number or complexity of choices. Overchoice has been associated with...

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Cognitive bias

A cognitive bias (e.g. Ariely, 2008) is a systematic (non-random) error in thinking, in the sense that a judgment deviates from what would be considered desirable from the perspective of accepted norms or correct in terms of formal logic. The application of heuristics is often associated with cognitive biases, some of which, such as those...

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Cognitive dissonance

Cognitive dissonance, an important concept in social psychology (Festinger, 1957), refers to the uncomfortable tension that can exist between two simultaneous and conflicting ideas or feelings—often as a person realizes that s/he has engaged in a behavior inconsistent with the type of person s/he would like to be, or be seen publicly to be. According...

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Commitment

Commitments (see also precommitment) are often used as a tool to counteract people’s lack of willpower and to achieve behavior change, such as in the areas of dieting or saving—the greater the cost of breaking a commitment, the more effective it is (Dolan et al., 2010). From the perspective of social psychology, individuals are motivated...

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Confirmation bias

Confirmation bias occurs when people seek out or evaluate information in a way that fits with their existing thinking and preconceptions. The domain of science, where theories should advance based on both falsifying and supporting evidence, has not been immune to bias, which is often associated with people trying to bolster existing attitudes and beliefs....

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Control premium

In behavioral economics, the control premium refers to people’s willingness to forego potential rewards in order to control (avoid delegation) of their own payoffs. In an experiment, participants were asked to choose whether to bet on another person or themselves answering a quiz question correctly. Although individuals’ maximizing their rewards would bet on themselves in...

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Decision fatigue

There are psychological costs to making decisions. Since choosing can be difficult and requires effort like any other activity, long sessions of decision making can lead to poor choices. Similar to other activities that consume resources required for executive functions, decision fatigue is reflected in self-regulation, such as a diminished ability to exercise self-control (Vohs...

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Decision staging

When people make complex or long decisions, such as buying a car, they tend to successively explore their options. This includes what information to focus on, as well as choices between attributes and alternatives. For example, when people narrow down their options, they often tend to screen alternatives on the basis of a subset of...

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Decoy effect

Choices often occur relative to what is on offer rather than based on absolute preferences. The decoy effect is technically known as an ‘asymmetrically dominated choice’ and occurs when people’s preference for one option over another changes as a result of adding a third (similar but less attractive) option.  For example, people are more likely...

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Default (option/setting)

Default options are pre-set courses of action that take effect if nothing is specified by the decision maker (Thaler & Sunstein, 2008), and setting defaults is an effective tool in choice architecture when there is inertia or uncertainty in decision making (Samson, 2014). Requiring people to opt-out if they do not wish to donate their...

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Disposition effect

The disposition effect refers to investors’ reluctance to sell assets that have lost value and greater likelihood of selling assets that have made gains (Shefrin & Statman, 1985). This phenomenon can be explained by prospect theory (loss aversion), regret avoidance and mental accounting. Shefrin, H., & Statman, M. (1985). The disposition to sell winners too...

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Diversification bias

People seek more variety when they choose multiple items for future consumption simultaneously than when they make choices sequentially, i.e. on an ‘in the moment’ basis.  Diversification is non-optimal when people overestimate their need for diversity (Read & Loewenstein, 1995). In other words, sequential choices lead to greater experienced utility. For example, before going on...

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Dual-self model

In economics, dual-self models deal with the inconsistency between the patient long-run self and myopic short-run self. With respect to savings behavior, Thaler and Shefrin (1981) introduced the concepts of the farsighted planner and myopic doer. At any point in time, there is a conflict between those selves with two sets of preferences. The approach...

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Dual-system theory

Dual-system models of the human mind contrast automatic, fast, and non-conscious (System 1) with controlled, slow, and conscious (System 2) thinking. Many heuristics and cognitive biases studied by behavioral economists are the result of intuitions, impressions, or automatic thoughts generated by System 1 (Kahneman, 2011). Factors that make System 1’s processes more dominant in decision...

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Efficient market hypothesis

According to the efficient market hypothesis, the price (market value) of a security reflects its true worth (intrinsic value). In a market with perfectly rational agents, “prices are right”. Findings in behavioral finance, by contrast, suggests that asset prices also reflect the trading behavior of individuals who are not fully rational (Barberis & Thaler, 2003),...

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Ego depletion

Ego depletion is a concept from self-regulation (or self-control) theory in psychology. According to the theory, willpower operates like a muscle that can be exerted. Studies have found that tasks requiring self-control can weaken this muscle, leading to ego depletion and a subsequently diminished ability to exercise self-control. In the lab, ego depletion has been...

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Elimination-by-aspects

Decision makers have a variety of heuristics at their disposal when they make choices. One of these effort-reducing heuristics is referred to as elimination-by-aspects. When this heuristic is applied, decision makers gradually reduce the number of alternatives in a choice set, starting with the most important one. One cue is evaluated at a time until...

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(Hot-cold) Empathy gap

It is difficult for humans to predict how they will behave in the future. A hot-cold empathy gap occurs when people underestimate the influence of visceral states (e.g. being angry, in pain, or hungry) on their behavior or preferences. In medical decision making, for example, a hot-to-cold empathy gap may lead to undesirable treatment choices...

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Endowment effect

This bias occurs when we overvalue something that we own, regardless of its objective market value (Kahneman, Knetsch, & Thaler, 1991). It is evident when people become relatively reluctant to part with a good they own for its cash equivalent, or if the amount that people are willing to pay for the good is lower...

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Fairness

In behavioral science, fairness refers to our social preference for equitable outcomes. This can present itself as inequity aversion, people’s tendency to dislike unequal payoffs in their own or someone else’s favor. The tendency has been documented through experimental games, such as the ultimatum, dictator, and trust games (Fehr & Schmidt, 1999). A large part...

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Fast and frugal

Fast and frugal decision-making refers to the application of ecologically rational heuristics, such as the recognition heuristic, which are rooted in the psychological capacities that we have evolved as human animals (e.g. memory and perceptual systems). They are ‘fast and frugal’ because they are effective under conditions of bounded rationality—when knowledge, time, and computational power...

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Framing effect

Choices can be presented in a way that highlights the positive or negative aspects of the same decision, leading to changes in their relative attractiveness. This technique was part of Tversky and Kahneman’s development of prospect theory, which framed gambles in terms of losses or gains (Kahneman & Tversky, 1979). Different types of framing approaches...

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Gambler’s fallacy

The term gambler's fallacy refers to the mistaken belief held by some people that independent events are interrelated. For example, a roulette or lottery player may not choose to bet on a number that came up in the previous round. Even though people are usually aware that successive draws of numbers are unrelated, their gut...

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(Behavioral) Game theory

Behavioral game theory is a mathematical approach to modeling behavior by analyzing the strategic decisions made by interacting players. Game theory in standard experimental economics operates under the assumption of the rational homo economicus, while behavioral game theory extends standard (analytical) game theory by taking into account how players feel about the payoffs other players...

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Habit

Habit is an automatic and rigid pattern of behavior in specific situations, which is usually acquired through repetition and develops through associative learning (see also System 1 in dual-system theory), when actions become paired repeatedly with a context or an event (Dolan et al., 2010). ‘Habit loops’ involve a cue that triggers an action, the...

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Halo effect

This concept has been developed in social psychology and refers to the finding that a global evaluation of a person sometimes influences people’s perception of that person’s other unrelated attributes. For example, a friendly person may be considered to have a nice physical appearance, whereas a cold person may be evaluated as less appealing (Nisbett...

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Hedonic adaptation

People get used to changes in life experiences, a process which is referred to as ‘hedonic adaptation’ or the ‘hedonic treadmill’. Just as the happiness that comes with the ownership of a new gadget or salary raise will wane over time, even the negative effect of life events such as bereavement or disability on subjective...

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Herd behavior

This effect is evident when people do what others are doing instead of using their own information or making independent decisions. The idea of herding has a long history in philosophy and crowd psychology. It is particularly relevant in the domain of finance, where it has been discussed in relation to the collective irrationality of...

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Heuristic

Heuristics are commonly defined as cognitive shortcuts or rules of thumb that simplify decisions. They represent a process of substituting a difficult question with an easier one (Kahneman, 2003). Heuristics can also lead to cognitive biases. There are disagreements regarding heuristics with respect to bias and rationality. In the fast and frugal view, the application...

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Hindsight bias

This bias, also referred to as the ‘knew-it-all-along effect’, is a frequently encountered judgment bias that is partly rooted in availability and representativeness heuristics. It happens when being given new information changes our recollection from an original thought to something different (Mazzoni & Vannucci, 2007). This bias can lead to distorted judgments about the probability...

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Homo economicus

The term homo economicus, or ‘economic man’, denotes a view of humans in the social sciences, particularly economics, as self-interested agents who seek optimal, utility-maximizing outcomes. Behavioral economists and most psychologists, sociologists, and anthropologists are critical of the concept. People are not always self-interested, nor do they have consistent preferences or be mainly concerned about...

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Honesty

Honesty is an important part of our everyday life. In both business and our private lives, relationships are made and broken based on our trust in the other party’s honesty and reciprocity. A 2016 study investigated honesty, beliefs about honesty and economic growth in 15 countries and revealed large cross-national differences. Results showed that average...

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Identity economics

Identity economics suggests that we make economic decisions based on monetary incentives and our identity. A person’s sense of self or identity affects economic outcomes. This was outlined in Akerlof & Kranton’s (2000) seminal paper which expanded the standard utility function to include pecuniary payoffs and identity economics in a simple game-theoretic model of behavior,...

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IKEA effect

While the endowment effect suggests that mere ownership of a product increases its value to individuals, the IKEA effect is evident when invested labor leads to inflated product valuation (Norton, Mochon, & Ariely, 2012). For example, experiments show that the monetary value assigned to the amateur creations of self-made goods is on a par with...

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Incentives

An incentive is something that motivates an individual to perform an action. It is therefore essential to the study of any economic activity. Incentives, whether they are intrinsic or extrinsic, can be effective in encouraging behavior change, such as ceasing to smoke, doing more exercise, complying with tax laws or increasing public good contributions. Traditionally the...

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Inequity aversion

Human resistance to inequitable outcomes is known as ‘inequity aversion’, which occurs when people prefer fairness and resist inequalities. In some instances, inequity aversion is disadvantageous, as people are willing to forego a gain, in order to prevent another person from receiving a superior reward. Inequity aversion has been studied through experimental games, such as...

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Inertia

In behavioral economics, inertia is the endurance of a stable state associated with inaction and the concept of status quo bias (Madrian & Shea 2001). In social psychology the term is sometimes also used in relation to persistence in (or commitments to) attitudes and relationships. Decision inertia is frequently counter-acted by setting defaults. Madrian, B.,...

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Information avoidance

Information avoidance in behavioral economics (Golman et al., 2017) refers to situations in which people choose not to obtain knowledge that is freely available. Active information avoidance includes physical avoidance, inattention, the biased interpretation of information (see also confirmation bias) and even some forms of forgetting. In behavioral finance, for example, research has shown that...

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Intertemporal choice

Intertemporal choice is an area of research concerned with the relative value people assign to payoffs at different points in time. It generally finds that people are biased towards the present (see present bias) and tend to discount the future (see time discounting).

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Less-is-better effect

When objects are evaluated separately rather than jointly, decision makers focus less on attributes that are important and are influenced more by attributes that are easy to evaluate. The less-is-better effect suggests a preference reversal when objects are considered together instead of separately. One study presented participants with two dinner set options. Option A included...

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Licensing effect

Also known as ‘self-licensing’, the licensing effect is evident when people allow themselves to do something bad (e.g. immoral) after doing something good (e.g. moral) first (Merritt, Effron & Monin, 2010). Well-publicized research in Canada asked participants to shop either in a green or a conventional online store. In one experiment, people who shopped in...

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Loss aversion

Loss aversion is an important concept associated with prospect theory and is encapsulated in the expression “losses loom larger than gains” (Kahneman & Tversky, 1979). It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. As people are more willing to take risks to avoid a...

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Mental accounting

Mental accounting is a concept associated with the work of Richard Thaler (see Thaler, 2015, for a summary). According to Thaler, people think of value in relative rather than absolute terms. They derive pleasure not just from an object’s value, but also the quality of the deal – its transaction utility (Thaler, 1985). In addition,...

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Mindless eating

The expression "mindless eating" has been coined by the eating behavior expert Brian Wansink. It refers to the finding that various cues associated with food non-consciously affect the amount and quality of people's consumption. Cues often serve as benchmarks in the environment. Cues may include serving containers, packaging, people, labels and atmospheric factors. They suggest...

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Myopic loss aversion

Myopic loss aversion occurs when investors take a view of their investments that is strongly focused on the short term, leading them to react too negatively to recent losses, which may be at the expense of long-term benefits (Thaler et al., 1997). This phenomenon is influenced by narrow framing, which is the result of investors...

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Naive allocation

Decision researchers have found that people prefer to spread limited resources evenly across a set of possibilities. This can be referred as naive allocation. For example, consumers may invest equal amounts of money across different investment options. Similarly, the diversification bias shows that consumers like to spread out consumption choices across a variety of goods....

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Nudge

According to Thaler and Sunstein (2008, p. 6), a nudge is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting...

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Optimism bias

People tend to overestimate the probability of positive events and underestimate the probability of negative events, a phenomenon known as optimism bias. For example, we may underestimate our risk of being in a car accident or getting cancer relative to other people.  A number of factors can explain unrealistic optimism, including self-serving biases, perceived control,...

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Overconfidence (effect)

The overconfidence effect is observed when people’s subjective confidence in their own ability is greater than their objective (actual) performance. It is frequently measured by having experimental participants answer general knowledge test questions. They are then asked to rate how confident they are in their answers on a scale. Overconfidence is measured by calculating the...

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Overjustification effect

This effect occurs when a person's intrinsic interest in a previously unrewarded activity is decreased as a result of engaging in that activity as a means to an extrinsic goal (e.g., financial reward) (Deci et al., 1999). Deci, E. L., Koestner, R., & Ryan, R. M. (1999). A meta-analytic review of experiments examining the effects...

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Pain of paying

People don't like to spend money. We experience pain of paying, because we are loss averse. This pain is thought to be reduced in credit card purchases, because plastic is less tangible than cash, the depletion of resources (money) is less visible and payment is deferred. Different types of people experience different levels of pain...

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Partitioning

The rate of consumption can be decreased by physically partitioning resources into smaller units, for example cookies wrapped individually or money divided into several envelopes. When a resource is divided into smaller units (e.g. several packs of chips), consumers encounter additional decision points—a psychological hurdle encouraging them to stop and think. In addition to the...

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Peak-end rule

According to the peak-end rule, our memory of past experience (pleasant or unpleasant) does not correspond to an average level of positive or negative feelings but to the most extreme point and the end of the episode (Kahneman & Tversky, 1999). The rule developed from findings that showed that evaluations of a past episode seem...

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Precommitment

Humans need a continuous and consistent self-image (Cialdini, 2008).  In an effort to align future behavior, being consistent is best achieved by making a commitment, especially if it is done publicly. Thus, precommitting to a goal is one of the most frequently applied behavioral devices to achieve positive change. The ‘Save More Tomorrow’ program, aimed...

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Preference

In economics, preferences are evident in theoretically optimal choices or real (behavioral) choices when people decide between alternatives. Preferences also imply an ordering of different options in terms of expected levels of happiness, gratification, utility, etc.  (Arrow, 1958). Preferences are sometimes elicited in survey research, which may be associated with a range of problems, such...

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Preference reversal

Preference reversal refers to a change in the relative frequency by which one option is favored over another in behavioral experiments, as evident in the less-is-better-effect or ratio bias, for example, or framing effects more generally. Preference reversals contradict the predictions of rational choice.

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Present bias

The present bias refers to the tendency of people to give stronger weight to payoffs that are closer to the present time when considering trade-offs between two future moments (O’Donoghue, &, Rabin, 1999). (See also time discounting.) O'Donoghue, T., & Rabin, M. (1999). Doing it now or later. American Economic Review, 89(1), 103-124.

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Priming (Conceptual)

Conceptual priming is a technique and process applied in psychology that engages people in a task or exposes them to stimuli. The prime consists of meanings (e.g. words) that activate associated memories (schema, stereotypes, attitudes, etc.). This process may then influence people’s performance on a subsequent task (Tulving, Schacter, & Stark, 1982). For example, one...

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(Myopic) Procrastination

People are shortsighted and often put off decisions, which may be partly due to inertia, the complexity of decision making (see choice overload) and present bias. Choice architects can help by providing a limited time window for action (see also scarcity) or a focus on satisficing (Johnson et al., 2012). Johnson, E. J., Shu, S....

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Projection bias

In behavioral economics, projection bias refers to people’s assumption that their tastes or preferences will remain the same over time. For example, people may overestimate the positive impact of a career promotion due to an under-appreciation of (hedonic) adaptation, put above-optimal variety in their planning for future consumption (see diversification bias), or underestimate the future...

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Prospect theory

Prospect theory is a behavioral model that shows how people decide between alternatives that involve risk and uncertainty (e.g. % likelihood of gains or losses). It demonstrates that people think in terms of expected utility relative to a reference point (e.g. current wealth) rather than absolute outcomes. Prospect theory was developed by framing risky choices...

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Ratio bias

The concept of ratio bias is rooted in our difficulties in dealing with proportions or ratios as opposed to absolute numbers. For example, when asked to evaluate two movie rental plans with a contracted scale (e.g. 7 and 9 new movies per week for Plans A and B, respectively) as opposed to an equivalent offering...

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Reciprocity

Reciprocity is a social norm that involves in-kind exchanges between people—responding to another’s action with another equivalent action. It is usually positive (e.g. returning a favor), but it can also be negative (e.g. punishing a negative action) (Fehr & Gächter, 2000). Reciprocity is an interesting concept from the perspective of BE, because it does not...

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Recognition heuristic

While a core heuristic in the heuristics and biases tradition of Tversky and Kahneman is availability a similar heuristic proposed in Gigerenzer's fast and frugal tradition is recognition. In the fast and frugal view, the application of heuristics is an “ecologically rational” strategy that makes best use of the limited information available to individuals. (Goldstein...

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Reference dependence

Reference dependence is one of the fundamental principles of prospect theory and behavioral economics more generally. In prospect theory (Kahneman & Tversky, 1979), people evaluate outcomes relative to a reference point, and then classify gains and losses (see also loss aversion, endowment effect). Reference dependence can apply to any decision involving risk and uncertainty. Online...

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Regret aversion

When people fear that their decision will turn out to be wrong in hindsight, they exhibit regret aversion. This bias is associated with risk aversion. Regret-averse people may fear the consequences of both errors of omission (e.g., not buying the right [optimal] investment property) and commission (e.g., buying the wrong [suboptimal] investment property) (Seiler et...

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Regulatory focus theory

The psychological theory of regulatory focus (Florack et al., 2013; Higgins, 1998) holds that human motivation is rooted in the approach of pleasure and the avoidance of pain, i.e. it differentiates a promotion focus from a prevention focus. The former involves the pursuit of goals that are achievement- or advancement-related, characterized by eagerness, whereas the...

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Representativeness heuristic

Representativeness is one of the major general purpose heuristics, along with availability and affect, and it is used when we judge the probability that an object or event A belongs to class B by looking at the degree to which A resembles B. When we do this, we neglect information about the general probability of...

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Risk-as-feelings

‘Consequentialist’ perspectives of decision making under risk or uncertainty (risky-choice theories, see e.g. prospect theory) tend to either focus on cognitive factors alone or consider emotions as an anticipated outcome of a decision. The risk-as-feelings hypothesis (Loewenstein et al., 2001), on the other hand, also includes emotions as an anticipatory factor, namely feelings at the...

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Satisficing

According to Herbert Simon, people tend to make decisions by satisficing (a combination of sufficing and satisfying) rather than optimizing (Simon, 1956). Decisions are often simply good enough in light of the costs and constraints involved. As a heuristic, satisficing individuals will choose options that meet basic decision criteria. A focus on satisficing can be...

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Scarcity (heuristic)

When an object or resource is less readily available (e.g, due to limited quantity or time), we tend to perceive it as more valuable (Cialdini, 2008). Scarcity appeals are often used in marketing to induce purchases. An experiment (Lee & Seidle, 2012) that used wristwatch advertisements as stimuli exposed participants to one of two different...

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Scarcity (psychology of)

People have a “mental bandwidth,” or brainpower, made up of attention, cognition, and self-control (Mullainathan & Sharif, 2013), which consists of finite resources that may become reduced or depleted. The scarcity mindset entails a feeling of not having enough of something. According to Mullainathan and Sharif, anyone can experience cognitive scarcity, but it is particularly...

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Self-control

Self-control, in psychology, is a cognitive process that serves to restrain certain behaviors and emotions vis-a-vis temptations and impulses. This aspect of self-regulation allows individuals to achieve goals (Diamond, 2013). (See also intertemporal choice, present bias, dual-self model, dual-system theory, ego depletion, and decision fatigue.) Diamond, A. (2013). Executive functions. Annual Review of Psychology, 64,

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Social norm

Social norms signal appropriate behavior and are classed as behavioral expectations or rules within a group of people (Dolan et al., 2010). Social norms of exchange, such as reciprocity, are different from market exchange norms (Ariely, 2008). Normative feedback (e.g. how one’s energy consumption level compares to the regional average) is often used in behavior...

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Social preferences

Social preferences are one type of preference investigated in behavioral economics and relate to the concepts of reciprocity, altruism, inequity aversion, and fairness.

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Social proof

The influence exerted by others on our behavior can be expressed as being either normative or informational. Normative influence implies conformity in order to be accepted or liked (Aronson, Wilson, & Akert, 2005), while informational influence occurs in ambiguous situations where we are uncertain about how to behave and look to others for information or...

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Status quo bias

Status quo bias is evident when people prefer things to stay the same by doing nothing (see also inertia) or by sticking with a decision made previously (Samuelson, & Zeckhauser, 1988). This may happen even when only small transition costs are involved and the importance of the decision is great. Field data from university health...

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Sunk cost fallacy

Individuals commit the sunk cost fallacy when they continue a behavior or endeavor as a result of previously invested resources (time, money or effort) (Arkes & Blumer, 1985). This fallacy, which is related to status quo bias, can also be viewed as bias resulting from an ongoing commitment. For example, individuals sometimes order too much...

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Take-the-best (heuristic)

Take-the-best is a simple decision-making shortcut that people may apply when choosing between alternatives. It is a one-reason decision rule, a type of heuristic where judgments are based on a single “good” reason only, ignoring other cues (Gigerenzer & Gaissmaier, 2011).  Using the take-the-best heuristic, a decision maker will base the choice on one attribute...

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Time (temporal) discounting

Time discounting research, which investigates differences in the relative valuation placed on rewards (usually money or goods) at different points in time, by comparing its valuation at an earlier date with one for a later date (Frederick, Loewenstein, & O’Donoghue, 2002), shows that present rewards are weighted more heavily than future ones. Once rewards are...

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Trust

Trust pervades human societies. It is indispensable in friendships, love, family, organizations and politics. Interpersonal trust is a mental construct with implications for social functioning and economic behavior as studied by trust games, for example. Although neoclassical economic theory suggests that trust in strangers is irrational, trust and trustworthiness can be widely observed across societies....

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Utility

In economics, utility refers to the benefits (satisfaction or happiness) consumers derive from a good, and it can be measured based on individuals’ choices between alternatives or preferences revealed in their willingness to pay. Behavioral economists have questioned past assumptions that utility is always maximized, and they have worked with both traditional and new utility...

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Zero price effect

The zero price effect suggests that traditional cost-benefits models cannot account for the psychological effect of a free good. A linear model assumes that changes in cost are the same at all price levels and benefits stay the same. As a result, a decrease in price will make a good equally more or less attractive...

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