Glossary of Behavioral Economics Terms
We are often asked to explain behavioral economics terms and how our MINDGUIDESM and BrandEmbraceSM services “fit” with existing concepts. The following terms and their definitions are our first steps to do both:
Affect
Observable emotional response.
Affect Heuristic
Heuristic in which the emotion associated with a decision option impacts its likelihood of selection.
Anchoring
Manipulation of choice options vis-à-vis a reference point (or option) so that their likelihood of selection is affected.
Asymmetrically Dominated Choice
Heightened likelihood of choice option selection by adding one or more unattractive choice options. (See Decoy Effect.)
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.
Availability Heuristic
Decision shortcut in which the ability of the respondent to recall information about the choice options impacts their likelihood of selection.
Bias
Change in the likelihood of a choice option being selected not related to the respondent’s own Utility Expectation Model.
Behavioral Economics
Discipline that includes a psychological or sociological explanation of economic behavior.
Bounded Rationality
Decision process strategy limited by human ability to process information proposed by Herbert Simon.
BrandEmbraceSM
Behavioral Science Lab service that computes an index of 0–100, indicating the degree to which a brand satisfies that buyer’s Utility Expectation Model.
Certainty/Possibility Effect
Likelihood of selection of choice options affected by the probability of gains or losses, determined not by the absolute value of the change, but by the degree of change relative to a base level. (See Saliency, Prospect Theory and Zero Price Effect.)
Choice Architecture
Method of or context within which the presentation of choice options affects the likelihood of option selection. (See Defaults, Framing and Decoy Effect.)
Choice Overload
Effect on the likelihood of choice option selection from a decision heuristic driven by a large number of decision options.
Cognitive Bias
Assessment of the selection of a decision option not conforming to norms, formal logic or external “rules.” (See Availability Bias, Representativeness, Optimism Bias and Confirmation Bias.)
Commitment
Explicit or implicit agreement, with or without consequences, to the acceptance of a future behavioral change.
Confirmation Bias
Effect on the likelihood of current choice option selections that confirm the utility of past decision option selections.
Decision Fatigue
Impact of multiple and/or complex decision tasks on the heightened likelihood of using a heuristic.
Decision ElementsSM
Mental constructs that serve as components of the Utility Expectation Model on which decision options are evaluated. To date, we have found that there are no more than nine and no fewer than six such Elements. They “appear” at the time of the purchase decision and may not be “available” to the buyer outside of that context. They are neither demographic nor psychographic in nature, but are related to the functional, emotional and social consequences of purchase. Decision Elements may be at different levels of saliency to the buyer and may be perceived and used differently.
Decision Element GatesSM
Components of the Utility Expectation Model, these are mental “rules” that specify how decision alternatives are evaluated against each element for each buyer. For example, an element relating to social responsibility will have different definitions and uses for different buyers.
Decision Gate BlueprintsSM
Components of the Utility Expectation Model, these are mental strategies that specify how the Element Gates are used in a decision. They persist over time; our longest longitudinal study of 14 months confirmed the same Blueprints in use. For this reason we believe that Blueprints are mental templates, much like muscle memory but for the mind. Interestingly, there appears to be a finite number of Blueprints in each product category. Looking across all of the all product categories evaluated to date, the majority of buyers can be described with roughly half the number of Blueprints as there are Elements in their Blueprint, making the purchase decision processes of most buyers in a category describable with only three or four Blueprints.
Decoy Effect
Heightened likelihood of choice option selection by adding one or more unattractive/unappealing choice options. (See Asymmetrically Dominated Choice.)
Defaults
Choice options “automatically” selected in the absence of a choice option selected by the respondent. (See Choice Architecture andInertia.)
Discounted Utility (DU)
Utility of some future event or possession calculated as a reduction (discount) from its present value.
Discounting
Reduction in the utility of choice options below their apparent utility. (See Choice Architecture and Time Discounting.)
Diversification Bias
Likelihood of selecting more choice options than are needed or useful. (See Projection Bias.)
Dual-system Decision Theory
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.
Empathy Gap (Hot-Cold/Positive-Negative)
Impact of a prior emotional state on the likelihood of selecting choice options and appears most pronounced when the difference (gap) in the pre- versus post- (choice) state is maximized.
Endowment Effect/Bias
Effect of the apparent overvaluing of a possession, including a relationship. (See Loss Aversion, Inertia and Status Quo Bias.)
Expectancy Theory
First proposed by Victor H. Vroom, this conceptual model suggests that the selection of behavioral choice options are directed by their anticipated consequences.
Framing Effect
Impact on the likelihood of choice option selection associated with the method of or context within which options are presented. For example, risky choice framing would be represented by presenting the identical likelihood of winning but in terms of both winning and losing (i.e., the likelihood of winning is 30 out of 100 cases, but the likelihood of losing is 70 out of 100 cases).
Game Theory
Study of strategy, tactics (decisions), risks, rewards and the effect of learning in the playing a game.
Habit/Habit Bias
Heuristic characterized by apparent “automatic” decision making and rigid conformity to the respondent’s Utility ExpectationModel.
Halo Effect
Diffusion of the perception of one characteristic of a person or thing to other characteristics of the same person or thing. For example, an attractive political candidate may also be considered warm and friendly.
Hedonic Adaptation/Treadmill
Belief that happiness/contentment reaches a stable and entropic level over time in spite of positive or negative emotional “ups” and “downs.” This steady-state level of happiness forms the basis by which the impact of upward or downward shifts are perceived.
Herd Behavior/Effect
Impact on decisions caused by participating in behavior and/or beliefs shared by a large number of others.
Heuristic
Mental decision-making shortcut often associated with a particular goal or purpose such as “price sensitive,” “brand loyal” and “discount driven.”
Hindsight Bias
Effect (‘knew it all along” effect) occurring when a rationale for a prior decision or conclusion is used to explain a current decision or conclusion. This may include the incorrect recollection of the circumstances of the prior decision or conclusion and/or the belief that the new decision or conclusion was the same or “predictable.”
IKEA Effect/Bias
Overvaluation of a product, belief or process in which there was participation in its development or completion. Related to the Endowment Effect but does not require ownership.
Inequity Aversion
Social approbation against participating in decisions that result in unequal distributions of wealth, value or prestige.
Inertia
Stable state associated with little change in beliefs, behavior, commitments, relationships or decisions.
Intertemporal Choice
Study of the impact of different periods of time in the future on the likelihood of selecting choice alternatives differing in risk, payoff or likelihood of occurrence. In most cases, the likelihood of selecting a positive outcome is higher the sooner it occurs in the future. (See Present Bias.)
Licensing/Self-licensing Effect
Higher likelihood of selecting a choice option considered “bad” or immoral, after selecting an option considered “good” or moral.
Loss Aversion
Higher likelihood of selecting a choice option that avoids a loss of the same magnitude as an alternative that promises a gain. Often called the “losses loom larger than gains” phenomenon first reported by Kahneman and Tversky and used to explain the Endowment Effect.
Mental Accounting
Finding that the value of money differs depending on its origin and intended use, contrary to the concept of Fungibility, which states the opposite.
MINDGUIDESM
Behavioral Science Lab service that generates the Utility Expectation ModelSM, Decision ElementsSM, Decision Element GatesSMand Decision Gate BlueprintsSM.
Optimism Bias/Effect
Finding that choice options with positive, higher utility outcomes will be perceived as more likely to occur than those with negative consequences.
Overconfidence Bias/Effect
Finding that an individual’s subjective assessment of their performance exceeds their objective performance.
Planning Fallacy
Finding that an individual’s estimate of the length of time it will take to complete a task is always shorter than the actual time required.
Peak-end Rule
Refers to findings that the pleasantness or unpleasantness of past experiences are more related to peaks, valleys and the ends of experiences.
Preference(s)
Desired choice alternatives, ordered on the basis of utility.
Present Bias/Effect
Higher likelihood of selecting choice options whose payoffs are nearer in time to the immediate present.
Priming/Creating a Psychological “Set”
Act of influencing subsequent tasks/measurements by inserting prior material overtly or subliminally.
Projection Bias/Effect
In behavioral economics, the degree to which one’s preferences, attitudes, beliefs and interests are believed to remain the same in the future.
In psychology, the degree to which others’ preferences, attitudes, beliefs and interests are believed to coincide with one’s own.
Prospect Theory
Model that describes the likelihoods of selecting choice options that differ in risk, probability of occurence and payoff. Some individuals may be more risk averse in order to be more loss averse, while others may be less risk averse to achieve a larger payoff.
Reciprocity
Social norm suggesting that the nature of interpersonal interaction is best explained as a system of exchanges of like kinds, i.e. the most likely response to a social exchange is one that is similar or equivalent to the one that stimulated it, either positive and negative. This is the notion of “Equivalent Action.”
Representativeness Heuristic/Bias
This decision shortcut technique suggests that decision options will be compared against alternatives whose utilities are known and that the degree of “fit” with these alternatives will impact the decision. This is similar to the proposed method of operation of the Utility Expectation Model.
Risk as Feelings Theory
This systems model of behavior suggests that the anticipated (expected) utility of a decision is impacted by its emotional consequences, often related to the risk of the outcome. In this way, it is similar to the Utility Expectation Model in associating a utility with the expected emotional consequences of a decision.
Saliency
Degree to which a Decision Element plays a role in the decision process. MINDGUIDESM surfaces low saliency but active Decision Elements through its proprietary data collection processes.
Social Norm
Accepted and appropriate rules of behavior for a group.
Social Proof
Influence of others to conform behaviorally.
Standard Economic Model
Expression of economic behavior with no reference to psychological or sociological concepts
Status Quo Bias/Effect
Increased likelihood of making the same (or similar) decisions in the future as were made in the past.
Sunk Cost Fallacy/Bias/Effect
Increased likelihood of deciding to continue a course of action due to the level of previously invested resources regardless of expected outcome.
Time/Temporal Discounting
Increased likelihood of selection of decision options whose positive consequences occur at an earlier date in the future, i.e., closer to the immediate present. This effect diminishes as the reward/utility alternatives occur further out in the future.
Utility
Benefits (satisfaction, happiness and/or well-being) derived from a good or service. Utility Expectation Model describes the template against which decision options are evaluated.
Utility Expectation Model
Computational model based on Expectancy Theory whose output is the expected utility values of purchase decision alternatives constructed on the basis of Decision ElementsSM, Decision Element GatesSM, and Decision Gate BlueprintsSM
Zero Price Effect
Relationship between the utility of products and services with zero price (free) and those with a non-zero price. Demand will usually be greatest for a zero (free) price option within a set of options with equal price reductions.