Key Terms

Question 1

Bias

Answer 1

a systematic violation from the normative assumption

Question 2

Heuristics

Answer 2

the “fast”, automatic decision rules people use that result in biases

Question 3

External Validity

Answer 3

the ability to transfer experiment conclusions to a wider setting outside the experiment

Question 4

Utility Function

Answer 4

summarizes the preferences of a consumer in terms of how much satisfaction, or (dis)utility, they get from consuming an available good or bundle of goods

Question 5

The Independence of Irrelevant Alternatives (IIA) criterion states that…

Answer 5

…an alternative is irrelevant if the removal of it does not change the choice.

Question 6

Priming Effect

Answer 6

when exposure to a certain stimulus subconsciously influences an individual’s response to subsequent stimuli

Question 7

Availability Heuristic

Answer 7

the ease with which an idea comes to mind affects how we estimate the likelihood or frequency of an event

Question 8

Transaction Utility

Answer 8

the utility that individuals derive from the process of making a purchase or participating in a transaction, separate from the utility they receive from consuming the good or service itself

Question 9

Reference Dependence

Answer 9

individuals evaluate outcomes relative to a reference point, and then classify gains and losses

Question 10

Status Quo Bias

Answer 10

when individuals exhibit a preference for the existing state, either by maintaining the current situation through inaction, or adhering to a prior decision (Samuelson & Zeckhauser, 1988)

Question 11

Endowment Effect

Answer 11

endowing someone with a good changes their valuation of that good

Question 12

Loss-Aversion

Answer 12

when an individual is willing to pay more to avoid losing an object than they are willing to pay to gain it

Question 13

Preference Reversal

Answer 13

a change in the relative frequency by which one option is favoured over another (Lichtenstein and Slovic, 1973)

Question 14

Within-Subject Experiments

Answer 14

each individual is exposed to more than one of the treatments being tested, and their behaviour under each condition is compared against

Question 15

Between-Subject Experiments

Answer 15

each individual is exposed to only one treatment, and behaviour between subjects under different conditions is compared

Question 16

Compromise Effect

Answer 16

the tendency to choose non-extreme options

Question 17

Decoy Effect (aka. Asymmetric Dominance Effect)

Answer 17

when consumers change their preference between two options when presented with a third option that is “asymmetrically dominated”

Question 18

Disjunction Effect

Answer 18

the tendency for people to want to wait to make decisions until information is revealed , even if the information isn’t really important for the decision, and even if they would make the same decision regardless of the information

Question 19

Risk

Answer 19

probabilities are known and objective, with researchers able to observe everyone’s shared belief of likelihoods

Question 20

Uncertainty (aka. Ambiguity)

Answer 20

probabilities are unknown and subjective, with researchers unable to directly observe people’s different beliefs on likelihoods

Question 21

Independence Axiom

Answer 21

introducing irrelevant prizes should not affect the consumer’s lottery preferences

Question 22

Archimedean Axiom

Answer 22

no lottery is infinitely good or infinitely bad

Question 23

Prospect Theory

Answer 23

behavioural model that shows how people decide between alternatives that involve risk and uncertainty

Question 24

Common Ratio Effect

Answer 24

when people focus on the ratio probability rather than the absolute probability

Question 25

Subadditivity

Answer 25

when people do not perceive probabilities as summing to one

Question 26

Skew Symmetric

Answer 26

the utility one gains from obtaining x and leaving y is the same as the disutility gained from obtaining y and leaving x

Question 27

Pessimism

Answer 27

an event seems more likely to occur if it’s much worse than another event

Question 28

Naïve Probability Weighting

Answer 28

when our perception of probabilties, π(p), is very different from the actual probabilties of an event, causing the sum of probabilities to not equal one

Question 29

Reflection Effect

Answer 29

having opposite preferences for gambles that have the same probability, but different signs

Question 30

Rank Dependent Utility

Answer 30

where probability weighting depends on both the probability of a prize and its rank in the lottery

Question 31

Completeness Axiom

Answer 31

any two bundles can be compared

Question 32

Reflexivity Axiom

Answer 32

any bundle is at least as good as itself

Question 33

Transitivity Axiom

Answer 33

if the consumer thinks that X is at least as good as Y, and that Y is at least as good as Z, then the consumer thinks that X is at least as good as Z

Question 34

Anchoring

Answer 34

the tendency to rely too heavily on the first piece of information available when making decisions

Question 35

Defaults

Answer 35

choices and/or settings presented to individuals, who must make deliberate actions to change them

Question 36

Mental Accounting

Answer 36

a theory of grouping and categorizing money and transactions so that an individual may systematically evaluate the potential trade-offs

Question 37

Certainty Equivalent (aka. Pound Equivalent)

Answer 37

the lowest amount of money-for-certain that an individual would be willing to accept instead of a lottery.

Question 38

Money Pump

Answer 38

when a pattern of intransitive or cyclical preferences causes a decision maker to be willing to pay repeated amounts of money to have these preferences satisfied without gaining any benefit

Question 39

Cognitive Psychology

Answer 39

studies the representation and processing of information by complex organisms; Tversky and Kahneman (1974) are the leaders in this field

Question 40

Framing Effect

Answer 40

when an individual’s decision making is influenced by the way information is presented

Question 41

Regret Theory

Answer 41

an individual’s preference for a gamble depends upon the other possible options that may be chosen

Question 42

Regret Aversion

Answer 42

you can rank outcomes; one prefers two small disappointments to one large one