Individual economic decision making - Terms

Question 1

What is Anchoring?

Answer 1

The first fact, or figure a person hears will bias their judgements and decisions down the line

Question 2

What is availability bias?

Answer 2

People tend to focus on what easily comes to mind ( often vivid or recent events ) and give undue weight to those events ( e.g thinking that shark attacks are more likely than cow attacks, or smokers justifying their behaviour by seeing an old smoker )

Question 3

What is Chunking?

Answer 3

Miller’s law: the average person can only hold 7 pieces of information in their short-term memory.

Breaking down information into smaller ‘chunks’ to make it easier to remember

Question 4

What is Bounded rationality?

Answer 4

When making decisions, an individual’s rationality is limited by three factors:
- The information they have
- The limitations of their minds
- The finite amount of time available in which to make decisions

Question 5

What is Loss Aversion?

Answer 5

The idea that people react to losses more strongly than to gains and so try to prevent them more than they try to make gains ( e.g “Limited time offer” flash sales )

Question 6

What is Cognitive Bias?

Answer 6

The reasoning that, for example, using rules of thumb or holding on to one’s preferences and beliefs, regardless of contrary information

Question 7

What is Framing?

Answer 7

The way in which something is framed can have significant impact on how consumers respond
( e.g saying you’re 10% likely to die or that the operation has 90% success rates )

Question 8

What is Default choice?

Answer 8

When an option is presented as the go-to one, or is simply selected automatically, meaning that any other has to be chosen instead. ( e.g asking people “do you not want to pay taxes”? )

Question 9

What is choice architecture?

Answer 9

A framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making

Question 10

What is mandated choice?

Answer 10

People are required by law to make a decision

Question 11

What are social norms?

Answer 11

Unwritten rules of behaviour that are considered acceptable in a group or society

Question 12

What’s endowment bias?

Answer 12

People overvalue what they’re emotionally invested in ( e.g ‘try before you buy’ promotions )

Question 13

What’s hedonic adaption?

Answer 13

The pleasure derived from a shiny new belonging that wears off as you get used to it ( e.g getting the newest best apple phone that you get normalised into soon after )