Behavioural Economics Flashcards
cognitive biases
Loss aversion
The endowment effect
Reducing effort when offered a monetary reward
Framing
Being unrealistic about future behaviour
Preferences for fairness
The sunk cost fallacy
The magic of “FREE!”
The deadweight loss of gift-giving
loss aversion
people avoid the risk of losses, because the pain of incurring a loss is greater than the pleasure of an equal-sized gain
The endowment effect
People value things more highly once they have been given property rights to it, than if they haven’t
They value a thing more highly if they already own it than if they don’t and are offered to buy it
Reducing effort when offered a monetary reward
Offering a monetary reward may not necessarily increase effort and performance
Framing effects
People’s preferences are often highly influenced by how alternatives are presented
Being unrealistic or failure to predict future behaviour
people do not always act predictably or in their best interest
Why do we smoke, eat unhealthy food and omit to exercise when we know
this has a negative impact on our future wellbeing?
Preferences for fairness
People value fairness enough that they will refuse to participate in transactions they consider unfair, even if this means they’re worse off as a result
the sunk cost fallacy
People should always ignore sunk costs when making decisions, but they often don’t
The magic of “FREE!”
People display an irrational excitement for anything that is FREE!
The deadweight loss of gift giving
Gifts represent complex social exchanges (signalling), rather than simple market exchanges
Nudge policy
A policy designed to structure choices so that people make a certain choice
Nudge is not supposed to impose any restrictions on anyone – just provide an
incentive
