Behavioral Economics

Behavioral economics studies how psychological factors and cognitive biases cause people to make decisions that depart from pure rationality.

Bounded rationality is the idea that people make reasonable decisions within the limits of their information, time, and mental capacity.

The sunk cost fallacy is continuing an endeavor because of money or effort already spent, even when it is no longer worthwhile.

Loss aversion is the tendency to feel the pain of a loss more strongly than the pleasure of an equal-sized gain.

Prospect theory describes how people choose among risky options based on perceived gains and losses relative to a reference point, not final wealth.

Anchoring bias is the tendency to rely too heavily on the first piece of information (the anchor) when making decisions.

A nudge is a small change in how choices are presented that steers behavior without banning options or changing incentives.

The framing effect is when people react differently to the same choice depending on how it is worded or presented.

The endowment effect is the tendency to value something more highly simply because you own it, so you demand more to sell it than you would pay to buy it.

Mental accounting is the tendency to sort money into separate mental 'buckets' and treat it differently depending on its source or intended use.

The decoy effect is when adding a clearly inferior third option nudges shoppers toward a specific one of the two original choices.

Status quo bias is the tendency to stick with the current situation or default option rather than switch, even when a better alternative exists.

The availability heuristic is the mental shortcut of judging how likely something is by how easily examples of it come to mind.

Confirmation bias is the tendency to seek, notice and remember evidence that supports what you already believe, while discounting evidence that does not.

Present bias is giving extra weight to costs and rewards that arrive right now, so plans made for later get overturned once later actually arrives.

Hyperbolic discounting values future rewards with a discount rate that falls as the delay grows, so waiting now costs far more than the same wait later on.

Choice architecture is the design of how options are presented, including their order, defaults, number and wording, which shapes what people end up picking.

The default option is the outcome that takes effect when a person makes no active choice, and it usually ends up being what most people get.

Overconfidence bias is systematically overrating your own knowledge, ability or precision, so predictions come out more certain than the evidence warrants.

Herd behavior is copying what a crowd is doing instead of acting on your own information, which can push prices and decisions far from the fundamentals.

Satisficing is searching until you find an option that clears a good-enough standard, then stopping, instead of comparing every option to find the best.

The ultimatum game is an experiment where one player proposes how to split a sum and the other can accept it or reject it, leaving both with nothing.

Bayesian updating is the rule for revising a probability after new evidence, weighting each possibility by how likely that evidence would be if it were true.