Biases in decision making Flashcards
Aspects of behavioural economic theory -> Individual economic decision making -> Microeconomics
What is Behavioral Economics?
It studies how psychological, emotional, and social factors influence economic decisions, often deviating from classical rational models.
What is Cognitive Bias?
Systematic and predictable mental errors in decision-making, often arising from heuristics or emotional influences.
What are Heuristics?
Mental shortcuts or rules of thumb that simplify decision-making but can lead to biased outcomes.
Cognitive Biases in Decision-Making
What is Confirmation Bias? Provide an example
The tendency to favor information that supports pre-existing beliefs while ignoring contradictory evidence.
Example: An investor focusing only on data that validates their stock pick, disregarding warning signs.
Cognitive Biases in Decision-Making
What is Status-Quo Bias? Provide an example.
A preference for the current state of affairs, resisting change even when alternatives may be superior.
Example: Staying with the same energy provider despite higher costs.
Cognitive Biases in Decision-Making
What is Memory Bias? Provide an example.
Decision-making influenced by significant emotional or vivid memories, which may not represent typical scenarios.
Example: Overestimating the danger of air travel due to a recalled plane crash incident.
Cognitive Biases in Decision-Making
What is Observational Selection Bias? Provide an example.
Overestimating the frequency of occurrences after recently noticing them.
Example: Seeing a car model more often after buying one.
Cognitive Biases in Decision-Making
What is In-Group Bias? Provide an example.
Favoring one’s own group over outsiders, often leading to exclusionary behavior.
Example: Preferring to hire candidates from one’s university.
Cognitive Biases in Decision-Making
What is Positive Expectation Bias? Provide an example.
Optimism that circumstances will improve, often fueling gambling or speculative behavior.
Example: Believing that a losing streak in gambling will turn around.
Cognitive Biases in Decision-Making
What is Post-Purchase Rationalisation? Provide an example.
Justifying a poor purchasing decision to avoid cognitive dissonance.
Example: Convincing oneself that an overpriced item was worth it.
Cognitive Biases in Decision-Making
What is Neglecting Probability? Provide an example.
Misjudging the likelihood of events, often overestimating risks of safe activities or underestimating dangerous ones.
Example: Fearing plane crashes more than car accidents despite statistical evidence.
Cognitive Biases in Decision-Making
What is Negativity Bias? Provide an example.
Giving more weight to negative information than positive.
Example: Being more influenced by a bad review than multiple good ones.
Cognitive Biases in Decision-Making
What is Bandwagon Effect Bias? Provide an example.
Adopting behaviors or beliefs because others do.
Example: Buying a product because it’s trending on social media.
Cognitive Biases in Decision-Making
What is Current Moment Bias? Provide an example.
Preferring immediate gratification over long-term benefits.
Example: Spending on luxuries instead of saving for retirement.
Cognitive Biases in Decision-Making
What is Availability Bias? Provide an example.
Judging probabilities based on vivid or easily recalled examples.
Example: Overestimating lottery-winning chances after media stories about jackpot winners.
Cognitive Biases in Decision-Making
What is Anchoring? Provide an example.
Relying heavily on initial information (“anchor”) when making decisions.
Example: Perceiving a $40 wine as reasonable because a $100 wine is on the menu.
Social Norms and Economic Decision-Making
What are Social Norms? Provide examples of positive and negative norms.
Patterns of behavior considered acceptable by society.
- Positive Norms: Shifted public attitudes on smoking due to health campaigns.
- Negative Norms: Heavy drinking among youth influenced by peer expectations.
Social Norms and Economic Decision-Making
What is the difference between Economic Sanctions and Nudges?
- Economic Sanctions: Regulations restricting freedom (e.g., smoking bans).
- Nudges: Indirect influences encouraging desirable behavior (e.g., calorie labels).
What are the critiques of Behavioral Economics?
- Effectiveness of Nudges: Nudges may only influence some individuals, whereas sanctions have broader, enforceable impacts.
- Ethical Concerns: Critics argue nudges can manipulate people subtly without informed consent.
- Limited Scope: Some biases may not significantly alter macroeconomic trends, focusing instead on individual decisions.
How is Behavioral Economics applied in Microeconomics?
- Market Behavior: Businesses exploit biases like anchoring (e.g., sales strategies).
- Consumer Protection: Policymakers use insights to design interventions that guide better choices, like reducing unhealthy food consumption.
- Public Policy: Behavioral theories inform taxation, subsidies, and welfare programs.
What is Prospect Theory? Provide an example.
Developed by Kahneman & Tversky, it states that people value gains and losses differently, leading to irrational risk-aversion or risk-seeking behavior.
Example: Loss aversion explains reluctance to sell a losing investment.
What is Bounded Rationality?
A theory by Herbert Simon suggesting decisions are limited by information, cognitive capacity, and time constraints.
It explains why individuals rely on heuristics, leading to biases.
What is Nudge Theory?
A concept by Thaler & Sunstein where small design changes in choice architecture influence behavior predictably without restricting options.
