Behavioralecon:Glossary OverviewCourse Main Page-- Week 1: Introduction to Irrationality-- Week 2: The Psychology of Money-- Week 3: Dishonesty-- Week 4: Labor and Motivation-- Week5: Self-control-- Week 6: Emotion-- Glossary-- Transcripts of lectures-- Summaries of readings A list of terms to know for A Beginner's Guide to Irrational Behavior. A Action control theory Self-regulation theory suggesting that after choosing a course of action, people focus on how to effectively implement the chosen course of action and disregard or down- play alternatives. Adam-and-Eve problem Would you sacrifice eternity in the garden of Eden for an apple? (No, but I would for knowledge of good and evil :-)) Adaptation In economics, described as economic adaptation. When an agent must change their economic characteristics based on some type of shock. The shock, whether positive or negative will affect the spending habits of the agent Affect heuristic The positive and negative feelings that combine with reasoned analysis to guide our judgments, decisions, and actions; the sense (not necessarily conscious) that some- thing is good or bad. A mental shortcut in which emotional response, or "affect" in psychological terms, plays a lead role. Reading the words "lung cancer" usually gen- erates an affect of dread. Affective forecasting also known as 'hedonic forecasting' the prediction of one's affect (emotional state) in
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when an individual has to make a judgment (of a target attribute) that is computa-
tionally complex, and instead substitutes a more easily calculated heuristic attribute.
Authority ranking relationship (AR)
Relationship recognized by its clear superior-subordinate relationships (see Fiske's
relational theory).
Automated process
Process taking place in the absence of effort, awareness, and intention and typically
running to completion once initiated.
Availability heuristic
"if you can think of it, it must be important." the easier it is to recall the consequencesof something, the greater we perceive these consequences to be.
B
BDM Procedure
Becker-DeGroot-Marschak (1964) procedure, asking participants to make a bid on
their product between 0 and 100 cents (pretesting revealed that no participant bidmore than $1.00). A random number is then drawn between 0 and 100; if participants'
number is equal to or above that number, they pay that amount and take their cre-
ation home, if their bid is below the number, they don't buy it.
Behavioral economics
Behavioral economics and the related field, behavioral finance, study the effects of so-
cial, cognitive, and emotional factors on the economic decisions of individuals and
institutions and the consequences for market prices, returns, and the resource alloca-
tion. The fields are primarily concerned with the bounds of rationality of economic
agents.
Bias
Bias is an inclination of temperament or outlook to present or hold a partial perspec-
tive at the expense of (possibly equally valid) alternatives in reference to objects, peo-
ple, or groups. Anything biased generally is one-sided and therefore lacks a neutral
The voluntary imposition of constraints (that are costly to overcome) on one's future
choices in a strategic attempt to resist future temptations.
Bonuses
Money paid relating to how well one works. Synonym: Performance-related pay.
Bounded rationality
The idea that in decision-making, rationality of individuals is limited by the informa-
tion they have, the cognitive limitations of their minds, and the finite amount of time
they have to make a decision. It was proposed by Herbert A. Simon as an alternative basis for the mathematical modeling of decision making, as used in economics and
related disciplines.
C
Categorization malleability
The availability of ways to categorize dishonest actions in more compatible terms andfind rationalizations for them.
Change blindness
when a change in a visual stimulus goes unnoticed by the observer
Cheating
Cheating refers to an immoral way of achieving a goal: the getting of reward for abili-
ty by dishonest means.
Choice architecture
Term used by Cass Sunstein and Richard Thaler to describe the way in which deci-
sions may (and can) be influenced by how the choices are presented.
Process involving conscious effort, awareness, and intention, that can be stopped at
will.
Cost/benefit analysis
A systematic process for calculating and comparing benefits and costs of a project,
decision or government policy.
Counteractive control
A variety of cognitive, affective, and motivational processes in order to counteract the
influence of short-term costs and, thus, secure long-term outcomes when faced with aself-control dilemma in which short-term costs are in opposition to long-term out-
comes (e.g. discomfort of medical checkup vs long-term health benefits).
Counteractive control theory (CCT)
Valenced short-term outcomes may elicit more intense self-control efforts that, in
turn, act to increase the likelihood of choosing according to long-term outcomes.
Counterfactual thinking
The tendency people have to imagine alternatives to reality (what if...).
Creative dishonesty
The idea that being more creative, or being primed to be creative, can lead to more
dishonest behavior. Creative individuals are thought to have the capabilities to findloopholes and then rationalize unethical behavior.
D
Decoy effect
The phenomenon whereby consumers will tend to have a specific change in prefer-
ence between two options when also presented with a third option that is inferior inall respects to one option; but, in comparison to the other option, it is inferior in some
respects and superior in others. A higher percentage of consumers will prefer the
Theory that "people apprehend reality in two fundamentally different ways, one vari-
ously labeled intuitive, automatic, natural, nonverbal, narrative, and experiential, and
the other analytical, deliberative, verbal, and rational” (Epstein). Stanovich and West
(2000) labeled these two modes of thinking System 1 and System 2. One of the charac-
teristics of System 1, the experiential or intuitive system, is its affective basis. Al-though analysis (System 2) is certainly important in many decision-making circum-
stances, reliance on affect and emotion is generally a quicker, easier, and more effi-
cient way to navigate in a complex, uncertain and sometimes dangerous world.
Duration neglect
when duration isn't proportional to value. a component of peak-end-rule
E
Effectance
Ability to successfully produce desired outcomes in one’s environment.
Effort justification
The more effort people put into some pursuit, the more they come to value it.
Egg Theory
The minimal effort required to add eggs and milk to a cake mix makes us value the
cake more.
Ego depletion
When we are continually exerting self-control, our ability to resist temptation weak-
ens (Roy Baumeister).
Emotion
A positive or negative experience that is associated with a particular pattern of physi-
The tendency to underestimate the influence or strength of feelings, in either oneself
or others.
Empathy
The capacity to recognize emotions that are being experienced by another person.
Endowment effect
The fact that people often demand much more to give up an object than they would
be willing to pay to acquire it.
Equality matching relationship (EM)
EM relationships lie somewhere between CS and AR relation- ships—they are very
structured but exhibit equality. In EM relationships, everybody receives the same re-wards, and reci- procity is monitored to ensure that the scales never get too far out of
balance (see Fiske's relational theory).
Expectation
What is considered the most likely to happen; a belief that is centered on the future.
Expected utility
Theory of utility in which "betting preferences" of people with regard to uncertain
outcomes (gambles) are represented by a function of the payouts (whether in money
or other goods), the probabilities of occurrence, risk aversion, and the different utility
of the same payout to people with different assets or personal preferences.
Experiment
F
Fairness (distributive justice)
In Social Psychology, Distributive Justice is defined as perceived fairness of how re-
wards and costs are shared by (distributed across) group members.[1] For example,
when workers of the same job are paid different salaries, group members may feel
In economics, fixed expenses are business expenses that are not dependent on the lev-
el of goods or services produced by the business.[1] They tend to be time-related,
such as salaries or rents being paid per month, and are often referred to as overhead
costs. This is in contrast to variable costs, which are volume-related (and are paid per
quantity produced).
Fluency
Fluency is the ease of which something is processed. Ease of processing can exist in
several forms depending on the modality in which processing occurs. Processing flu-
ency is the ease with which information is processed. Perceptual fluency is the ease of
processing stimuli based on manipulations to perceptual quality. The ease with
which information can be retrieved from memory is retrieval fluency.
Framing
An inevitable process of selective influence over the individual's perception of themeanings attributed to words or phrases. People build a series of mental filters
through biological and cultural influences. They use these filters to make sense of the
The tendency of people to discount rewards as they approach a temporal horizon in
the future or the past (i.e., become so distant in time that they cease to be valuable or
to have additive effects). To put it another way, it is a tendency to give greater value
to rewards as they move away from their temporal horizons and towards the "now".
Intra-empathy gap
Our inability to make predictions about our future actions in an emotional state.
Irrationality
Cognition, thinking, talking or acting without inclusion of rationality; an action oropinion given through inadequate use of reason, emotional distress, or cognitive defi-
ciency.
J
K
L
Labor
A measure of the work done by human beings.
Level of mutability of the stimulus
The level of mutability of the stimulus (e.g. information, object, circumstances) is theextent to which this stimulus is modifiable. Low mutability suggests that it is very
difficult to imagine the situation had been different, while high mutability means that
this is easy.
Libertarian paternalism
A philosophy that advocates designing institutions that help people make better deci-
sions but do not impinge on their freedom to choose. Automatic enrollment is a good
The subconscious phenomenon whereby increased confidence and security in one’s
self-image or self-concept tends to make that individual worry less about the conse-
quences of subsequent immoral behavior and, therefore, more likely to make im-
moral choices and act immorally. Synonym: self-licensing.
Life cycle theory of saving
Households are assumed to want to smooth consumption over the life cycle and are
expected to solve the relevant optimization problem in each period before deciding
how much to consume and how much to save. Actual household behavior might dif-
fer from this optimal plan.
Limbic system
A complex set of brain structures that lies on both sides of the thalamus, right under
the cerebrum. It appears to be primarily responsible for our emotional life, and has a
great deal to do with the formation of memories.
Loss aversion
People's tendency to strongly prefer avoiding losses to acquiring gains. Some studiessuggest that losses are twice as powerful, psychologically, as gains. First convincingly
demonstrated by Amos Tversky and Daniel Kahneman.
Lottery
A lottery is a form of gambling which involves the drawing of lots for a prize which
may be a certain amount of money.
M
Macbeth effect
A threat to one’s moral purity induces the need to cleanse oneself.
sired goal and elicits, controls, and sustains certain goal directed behaviors. It can be
considered a driving force; a psychological one that compels or reinforces an action
toward a desired goal. For example, hunger is a motivation that elicits a desire to eat.
N
Nomothetic approachApproach based on what Kant described as a tendency to generalize. It describes the
effort to derive laws that explain objective phenomena in general.
Norm theory
Theory presented by Kahneman and Miller, postulating that norms are computed af-
ter the event has occurred rather than in advance. Specifically, they proposed that“each stimulus selectively recruits its own alternatives and is interpreted in a rich
context of remembered and constructed representations of what it could have been,
might have been, or should have been”.
Norm-focus theory
According to norm-focus theory (Cialdini), the social context determines whether
people attend to descriptive or injunctive norms at a particular time and how thesenorms will impinge on an individual’s immediate behavior.
Normative theories
Characterize rational choice and are often derived by solving some kind of optimiza-
tion prob- lem. The life cycle hypothesis is an example of a normative theory of sav-
ing since it is based on the solution to a lifetime consumption-smoothing problem.
Not-Invented-Here bias
Syndrome in which people, e.g. managers, refuse to use perfectly good ideas devel-
oped elsewhere in favor of their – sometimes inferior – internally-developed ideas.
O
Opportunity cost
What you are giving up by choosing one thing over another. Synonym: Shadow val-
find the best option available. It explains the tendency to select the first option that
meets a given need or select the option that seems to address most needs rather than
the “optimal” solution.
Save More Tomorrow (or SMarT)
Program to help people save more. The basic idea is to give workers the option of
committing themselves now to increasing their savings rate later, each time they get a
raise.
Self-affirmation
By reflecting on their important values or past positive behaviors, people are remind-
ed that they are moral and efficacious individuals, thereby affirming their self-worth.
A cornerstone of self-affirmation theory is the idea that specific attacks on one’s abili-ties or morals – such as failure on a test – do not need to be dealt with directly, but
rather can be addressed at a more general level by restoring or reaffirming a global
sense of self-worth.
Self-control contract
See: Ulysses contract.
Self-control
An umbrella construct that bridges concepts and measurements from different disci-
plines (e.g. impulsivity, conscientiousness, self-regulation, delay of gratification, inat-
Humans have a systematic tendency to switch towards "vices" (products or activities
which are pleasant in the short term) from "virtues" (products or activities which are
seen as valuable in the long term) as the moment of consumption approaches, even if
this involves changing decisions made in advance. Consider having the choice be-
tween getting the day off work tomorrow or getting a day and a half off work onemonth from now. Suppose you would choose one day off tomorrow. Now suppose
that you were asked to make that same choice ten years ago. That is, you were asked
then whether you would prefer getting one day off in ten years or getting one and a
half days off in ten years and one month. Suppose that then you would have taken
the day and a half off. This would be a case of time inconsistency because your rela-
tive preferences for tomorrow versus one month from now would be different at two
different points in time — namely now versus ten years ago. The decision made ten
years ago indicates a preference for delayed gratification, but the decision made just
before the fact indicates a preference for immediate pleasure.
Toothbrush theory
We all need a toothbrush, we all want a toothbrush, but nobody wants to use any-
body else’s toothbrush. We want to create our own ideas and theories, but we don’t
want to rely on the ideas of others.
Transaction cost
A cost incurred in making an economic exchange (restated: the cost of participating
in a market.
Trolley problem
A thought experiment in ethics, first introduced by Philippa Foot in 1967. The generalform of the problem is this: Person A can take an action which would benefit many
people, but in doing so, person B would be unfairly harmed. Under what circum-
stances would it be morally just for Person A to violate Person B's rights in order to
benefit the group?
Two-system theory
Provides an account of how a phenomenon can occur in two different ways, or as a
result of two different processes. Often, the two processes consist of an implicit (auto-
matic), unconscious process and an explicit (controlled), conscious process.
A game in which a proposer offers a division of a commodity (e.g., chips to be con-
verted to money), and a responder can accept or reject the proposed division. If the
responder accepts, the commodity is divided as proposed; if the responder rejects,
neither party receives anything.
Ulysses (commitment) contracts
Contract in which you know your future self will be tempted and you bind your cur-
rent self to prevent your future self from misbehaving.
Utility
A representation of preferences over some set of goods and services.
V
Vice product
A product that is often bought impulsively, even though consumers consider theproducts to be unhealthy and experience regret after the purchase. Opposite: Virtue
product.
Visceral factor
A wide range of negative emotions (anger, fear), drive states (hunger, thirst, sexual
desire) and feeling states (pain) that grab people's attention and motivate them to en-
gage in specific behaviors. Unlike preferences they can change desire rapidly because
they are affected by changing internal bodily states and external stimuli. Can be mod-
eled as 'state-dependent preferences' motivating people to engage in specific behav-
iors through the combined application of carrots and sticks.
Visceral regulator
Visual illusions
Characterized by visually perceived images that differ from objective reality. The in-
formation gathered by the eye is processed in the brain to give a perception that does