Chapter 8: Behavioral Economics Test Questions – Flashcards

The dominant and conventional branch of economic theory that attempts to predict human behavior by building economics models based o simplifying assumptions about people's motives and capabilities. These entirely by self-interest; good at math; and inaffected by heuristics, time inconsistency, and self-control problems

The branch of economic theory that combines insights from economics, psychology, and biology to make more accurate predictions about human behavior than conventional neoclassical economics, which is hampered by its core assumptions that people are fundamentally rational and almost entirely self-interested. Behavioral economics can explain framing effects, anchoring, mental accounting, the endowment effect, status quo bias, time inconsistency, and loss aversion

Behaviors and decisions that maximize a person's chances of achieving his or her goals

Suboptimal choices that (1) are not rational because they do not maximize a person's chances of achieving his or her goals and (2) occur routinely, repeatedly, and predictability

The brain's low-energy mental shortcuts for making decisions. They are "fast and frugal" and work well in most situations but in other situations result in systematic errors

Misperceptions or misunderstandings that cause systematic errors. Most result either (1) from heuristics that are prone to systematic errors or (2) because the brain is attempting to solve a type of problem (such as a calculus problem) for which it was not evolutionary evolved and for which it has little innate capability

In prospect theory, changes in people's decision making caused by new information that alters the context, or "frame of reference," that they use to judge whether options are viewed as gains or losses relative to the status quo

The existing state of affairs; in prospect, the current situation from which grains and losses are calculated

In prospect theory, the property or most peoples preferences that the pain generated by losses feels substantially more intense than the pleasure generated by gains

A behavioral economics theory of preferences having three main features: (1) people evaluate options on the basis of whether they generate gains or losses relative to the status quo; (2) gains are subject to diminishing marginal utility, while losses are subject to diminishing marginal disutility, and (3) people are prone to loss aversion

The tendency people have to unconsciously base, or "ancho," the valuation of an item they are currently thinking about on recently considered but logically irrelevant information

The tendency people have to create separate "mental boxes" (or "accounts") in which they deal with particular financial transactions in isolation rather than dealing with them as part of an overall decision-making process that would consider how to best allocate their limited budgets across all possible options by using the utility maximizing rule

The tendency people have to place higher valuations on items they possess (are endowed with) than on identical items they do not possess; perhaps caused by loss aversion

The tendency most people have when making choices to select any option that is presented as the default (status quo) option

Refers to the difficulty human beings have with conceptualizing the more distant future. Leads to decisions that overly favor present and near-term options at the expense of more distant future possibilities

The human tendency to systematically misjudge at the present time what will actually end up being desired at a future time

Refers to the difficulty people have in sticking with earlier plans and avoiding suboptimal decisions when finally confronted with a particular decision-making situation. A manifestation of time incosistency and potentially avoidable by using precommitments

Actions taken ahead of time that make it difficult for the future self to avoid doing what the present self desires

A person's opinion as to whether price a price, wage, or allocation is considered morally or ethically acceptable

A mutually anonymous behavioral economics games in which one person ("the dictator") unilaterally determines how to split an amount of money with the second player

The behavioral economics game in which a mutually anonymous pair of players interact to determine how an amount of money is to be split. The first player suggests a division. The second player either accepts that proposal (in which case the split is made accordingly) or rejects it (in which case neither player gets anything)