Glossary

When people make complex or long decisions, such as buying a car, they tend to successively explore their options. This includes what information to focus on, as well as choices between attributes and alternatives. For example, when people narrow down their options, they often tend to screen alternatives on the basis of a subset of attributes and then compare alternatives. Choice architects may not only break down complex decisions into multiple stages to make the process easier, they can also work with an understanding of successive decision making by facilitating certain comparisons at different stages of the choice process (Johnson et al., 2012).

Heightened likelihood of choice option selection by adding one or more unattractive/unappealing choice options. (See Asymmetrically Dominated Choice.)

Choice options “automatically” selected in the absence of a choice option selected by the respondent. (See Choice Architecture and Inertia.)

Utility of some future event or possession calculated as a reduction (discount) from its present value.

Reduction in the utility of choice options below their apparent utility. (See Choice Architecture and Time Discounting.)`

The disposition effect refers to investors’ reluctance to sell assets that have lost value and greater likelihood of selling assets that have made gains (Shefrin & Statman, 1985). This phenomenon can be explained by prospect theory (loss aversion), regret avoidance and mental accounting.

Likelihood of selecting more choice options than are needed or useful. (See Projection Bias.)

In economics, dual-self models deal with the inconsistency between the patient long-run self and myopic short-run self. With respect to savings behavior, Thaler and Shefrin (1981) introduced the concepts of the farsighted planner and myopic doer. At any point in time, there is a conflict between those selves with two sets of preferences. The approach helps economic theorists overcome the paradox created by self-control in standard views of utility.

Model of decision making that suggests two processes, System/Type 1 being faster, more “automatic” and less dependent on a cognitive heuristic; System/Type 2 process is slower, more complex and cognitive and used for more important/riskier choice options.

According to the efficient market hypothesis, the price (market value) of a security reflects its true worth (intrinsic value). In a market with perfectly rational agents, “prices are right”. Findings in behavioral finance, by contrast, suggests that asset prices also reflect the trading behavior of individuals who are not fully rational (Barberis & Thaler, 2003), leading to anomalies such as asset bubbles.

Ego depletion is a concept from self-regulation (or self-control) theory in psychology. According to the theory, which has come under heavy scrutiny, willpower operates like a muscle that can be exerted. Studies have found that tasks requiring self-control can weaken this muscle, leading to ego depletion and a subsequently diminished ability to exercise self-control. In the lab, ego depletion has been induced in many different ways, such as having to suppress emotions or thoughts, or having to make a range of difficult decisions. The resulting ego depletion leads people to make less restrained decisions. Consumers, for example, may be more likely to choose candy over granola bars (Baumeister et al., 2008). More recent studies call this resource depletion model of self-control into question (e.g. Hagger & Chatzisarantis, 2016).

Decision makers have a variety of heuristics at their disposal when they make choices. One of these effort-reducing heuristics is referred to as elimination-by-aspects. When it is applied, decision makers gradually reduce the number of alternatives in a choice set, starting with the most important one. One cue is evaluated at a time until fewer and fewer alternatives remain in the set of available options (Tversky, 1972).