Key Terms Flashcards
Bias
a systematic violation from the normative assumption
Heuristics
the “fast”, automatic decision rules people use that result in biases
External Validity
the ability to transfer experiment conclusions to a wider setting outside the experiment
Utility Function
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
The Independence of Irrelevant Alternatives (IIA) criterion states that…
…an alternative is irrelevant if the removal of it does not change the choice.
Priming Effect
when exposure to a certain stimulus subconsciously influences an individual’s response to subsequent stimuli
Availability Heuristic
the ease with which an idea comes to mind affects how we estimate the likelihood or frequency of an event
Transaction Utility
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
Reference Dependence
individuals evaluate outcomes relative to a reference point, and then classify gains and losses
Status Quo Bias
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)
Endowment Effect
endowing someone with a good changes their valuation of that good
Loss-Aversion
when an individual is willing to pay more to avoid losing an object than they are willing to pay to gain it
Preference Reversal
a change in the relative frequency by which one option is favoured over another (Lichtenstein and Slovic, 1973)
Within-Subject Experiments
each individual is exposed to more than one of the treatments being tested, and their behaviour under each condition is compared against
Between-Subject Experiments
each individual is exposed to only one treatment, and behaviour between subjects under different conditions is compared
Compromise Effect
the tendency to choose non-extreme options
Decoy Effect (aka. Asymmetric Dominance Effect)
when consumers change their preference between two options when presented with a third option that is “asymmetrically dominated”
Disjunction Effect
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
Risk
probabilities are known and objective, with researchers able to observe everyone’s shared belief of likelihoods
Uncertainty (aka. Ambiguity)
probabilities are unknown and subjective, with researchers unable to directly observe people’s different beliefs on likelihoods
Independence Axiom
introducing irrelevant prizes should not affect the consumer’s lottery preferences
Archimedean Axiom
no lottery is infinitely good or infinitely bad
Prospect Theory
behavioural model that shows how people decide between alternatives that involve risk and uncertainty
Common Ratio Effect
when people focus on the ratio probability rather than the absolute probability
Subadditivity
when people do not perceive probabilities as summing to one
Skew Symmetric
the utility one gains from obtaining x and leaving y is the same as the disutility gained from obtaining y and leaving x
Pessimism
an event seems more likely to occur if it’s much worse than another event
Naïve Probability Weighting
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
Reflection Effect
having opposite preferences for gambles that have the same probability, but different signs
Rank Dependent Utility
where probability weighting depends on both the probability of a prize and its rank in the lottery
Completeness Axiom
any two bundles can be compared
Reflexivity Axiom
any bundle is at least as good as itself
Transitivity Axiom
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
Anchoring
the tendency to rely too heavily on the first piece of information available when making decisions
Defaults
choices and/or settings presented to individuals, who must make deliberate actions to change them
Mental Accounting
a theory of grouping and categorizing money and transactions so that an individual may systematically evaluate the potential trade-offs
Certainty Equivalent (aka. Pound Equivalent)
the lowest amount of money-for-certain that an individual would be willing to accept instead of a lottery.
Money Pump
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
Cognitive Psychology
studies the representation and processing of information by complex organisms; Tversky and Kahneman (1974) are the leaders in this field
Framing Effect
when an individual’s decision making is influenced by the way information is presented
Regret Theory
an individual’s preference for a gamble depends upon the other possible options that may be chosen
Regret Aversion
you can rank outcomes; one prefers two small disappointments to one large one
