Glossary

A hot-cold empathy gap occurs when people underestimate the influence of visceral states (e.g. being angry, in pain, or hungry) on their behavior or preferences (Loewenstein, 2005). In medical decision making, for example, a hot-to-cold empathy gap may lead to undesirable treatment choices when cancer patients are asked to choose between treatment options right after being told about their diagnosis.

This bias occurs when we overvalue something that we own, regardless of its objective market value (Kahneman et al., 1991). It is evident when people become relatively reluctant to part with a good they own for its cash equivalent, or if the amount that people are willing to pay for the good is lower than what they are willing to accept when selling it. Put more simply, people place a greater value on things once they have established ownership. This is especially true for things that wouldn't normally be bought or sold on the market, usually items with symbolic, experiential, or emotional significance.

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Choices can be presented in a way that highlights the positive or negative aspects of the same decision, leading to changes in their relative attractiveness. This technique was part of Tversky and Kahneman’s development of prospect theory, which framed gambles in terms of losses or gains (Kahneman & Tversky, 1979). Different types of framing approaches have been identified, including risky choice framing (e.g. the risk of losing 10 out of 100 lives vs the opportunity to save 90 out of 100 lives), attribute framing (e.g. beef that is 95% lean vs 5% fat), and goal framing (e.g. motivating people by offering a $5 reward vs imposing a $5 penalty) (Levin et al., 1998).

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Game theory is a mathematical approach to modeling behavior by analyzing the strategic decisions made by interacting players. Game theory in standard experimental economics operates under the assumption of homo economicus – a self-interested, rational maximizer. Behavioral game theory extends standard (analytical) game theory by taking into account how players feel about the payoffs other players receive, limits in strategic thinking, the influence of context, as well as the effects of learning (Camerer, 2003). Games are usually about cooperation or fairness. Well-known examples include the Prisoner’s Dilemma, Ultimatum Game and Dictator Game (Thaler, 2015).
The Ultimatum Game is an early example of research that uncovered violations of standard assumptions of rationality. In the experiment, one player (the proposer/allocator) is endowed with a sum of money and asked to split it between him/herself and an anonymous player (the responder/recipient). The recipient may either accept the allocator’s proposal or reject it, in which case neither of the players will receive anything. From a traditional game-theoretic perspective, the allocator should only offer a token amount and the recipient should accept it. However, results showed that most allocators offered more than just a token payment, and many went as far as offering an equal split. Some offers were declined by recipients, suggesting that they were willing to make a sacrifice when they felt that the offer was unfair (see also inequity aversion and fairness) (Guth et al., 1982).

Habit is an automatic and rigid pattern of behavior in specific situations, which is usually acquired through repetition and develops through associative learning (see also System 1 in dual-system theory), when actions become paired repeatedly with a context or an event (Dolan et al., 2010). ‘Habit loops’ involve a cue that triggers an action, the actual behavior, and a reward. For example, habitual drinkers may come home after work (the cue), drink a beer (the behavior), and feel relaxed (the reward) (Duhigg, 2012). Behaviors may initially serve to attain a particular goal, but once the action is automatic and habitual, the goal loses its importance. For example, popcorn may habitually be eaten in the cinema despite the fact that it is stale (Wood & Neal, 2009). Habits can also be associated with status quo bias.

This concept has been developed in social psychology and refers to the finding that a global evaluation of a person sometimes influences people’s perception of that person’s other unrelated attributes. Halo effects have also been applied in other domains of psychology. For example, a study on the ‘health halo’ found that consumers tend to choose drinks, side dishes and desserts with higher calorific content at fast‐food restaurants that claim to be healthy (e.g. Subway) compared to others (e.g. McDonald’s) (Chandon & Wansink, 2007).

People get used to changes in life experiences, a process which is referred to as ‘hedonic adaptation’ or the ‘hedonic treadmill’. Just as the happiness that comes with the ownership of a new gadget or salary raise will wane over time, even the negative effect of life events such as bereavement or disability on subjective well-being tends to level off, to some extent (Frederick & Loewenstein, 1999). When this happens, people return to a relatively stable baseline of happiness. It has been suggested that the repetition of smaller positive experiences (‘hedonic boosts’), such as exercise or religious practices, has a more lasting effect on our well-being than major life events (Mochon et al., 2008).

This effect is evident when people do what others are doing instead of using their own information or making independent decisions. The idea of herding has a long history in philosophy and crowd psychology. It is particularly relevant in the domain of finance, where it has been discussed in relation to the collective irrationality of investors, including stock market bubbles (Banerjee, 1992). In other areas of decision making, such as politics, science, and popular culture, herd behavior is sometimes referred to as ‘information cascades’ (Bikhchandi et al., 1992). Herding behavior can be increased by various factors, such as fear (e.g. Economou et al., 2018), uncertainty (e.g. Lin, 2018), or a shared identity of decision makers (e.g. Berger et al., 2018).