Glossary

Welcome to the Glossary

(Economic) Bubble

Economic (or asset) bubbles form when prices are driven much higher than their intrinsic value (see also efficient market hypothesis). Well-known examples of bubbles include the US Dot-com stock market bubble of the late 1990s and housing bubble of the mid-2000s. According to Robert Shiller (2015), who warned of both of these events, speculative bubbles are fueled by contagious investor enthusiasm (see also herd behavior) and stories that justify price increases. Doubts about the real value of investment are overpowered by strong emotions, such as envy and excitement. Other biases that promote bubbles include overconfidence, anchoring, and representativeness, which lead investors to interpret increasing prices as a trend that will continue, causing them to chase the market (Fisher, 2014). Economic bubbles are usually followed a sudden and sharp decrease in prices, also known as a crash.

Source: Behavioral Economics

(Myopic) Procrastination

People often put off decisions, which may be due to self-control problems (leading to present bias), inertia, or the complexity of decision making (see choice overload). Various nudge tools, such as precommitment, can be used to help individuals overcome procrastination. Choice architects can also help by providing a limited time window for action (see scarcity) or a focus on satisficing (Johnson et al., 2012).

Source: Behavioral Economics

Action bias

The impulse to act in order to gain a sense of control over a situation and eliminate a problem, termed action bias (Patt & Zeckhauser, 2000).

Source: Behavioral Economics

Affect

Observable emotional response.

Source: Behavioral Science Lab, 2017

Affect Heuristic

Heuristic in which the emotion associated with a decision option impacts its likelihood of selection.

Source: Behavioral Science Lab, 2017

Altruism

According to neoclassical economics, rational beings do whatever they need to in order to maximize their own wealth. However, when people make sacrifices to benefit others without expecting a personal reward, they are thought to behave altruistically (Rushton, 1984). Common applications of this pro-social behavior include volunteering, philanthropy, and helping others in emergencies (Piliavin & Charng, 1990).

Source: Behavioral Economics

Ambiguity (Uncertainty) Aversion

Ambiguity aversion, or uncertainty aversion, is the tendency to favor the known over the unknown, including known risks over unknown risks. For example, when choosing between two bets, we are more likely to choose the bet for which we know the odds, even if the odds are poor, than the one for which we don’t know the odds.

Source: Behavioral Economics

Anchoring

Manipulation of choice options vis-à-vis a reference point (or option) so that their likelihood of selection is affected.

Source: Behavioral Science Lab, 2017

Asymmetrically Dominated Choice

Heightened likelihood of choice option selection by adding one or more unattractive choice options. (See Decoy Effect.)

Source: Behavioral Science Lab, 2017

Availability Bias

Change in the likelihood of a choice option related to the apparent availability of options and not related to the respondent’s own expectation of utility.

Source: Behavioral Science Lab, 2017

Availability Heuristic

Decision shortcut in which the ability of the respondent to recall information about the choice options impacts their likelihood of selection.

Source: Behavioral Science Lab, 2017

Behavioral Economics

Discipline that includes a psychological or sociological explanation of economic behavior.

Source: Behavioral Science Lab, 2017