Behavioral Economics and Decision Theory Flashcards

Which concept in behavioral economics describes the tendency for individuals to weigh losses more heavily than equivalent gains?

Answer: Loss aversion

Loss aversion, a key finding by Kahneman and Tversky, shows that losses typically feel about twice as painful as equivalent gains feel pleasurable.

The 'endowment effect' in behavioral economics refers to which phenomenon?

Answer: People overvalue things they already own

The endowment effect occurs when people ascribe more value to items simply because they own them, leading to irrational pricing and trading behavior.

What does 'hyperbolic discounting' describe in behavioral economics?

Answer: Preference for immediate rewards that leads to time-inconsistent choices

Hyperbolic discounting describes how people disproportionately prefer immediate payoffs over future ones, causing preferences to reverse as the time horizon changes.

In prospect theory, how are outcomes typically evaluated?

Answer: Relative to a reference point rather than in absolute terms

Prospect theory, developed by Kahneman and Tversky, evaluates outcomes as gains or losses relative to a reference point, not as final wealth states.

Which term describes the behavioral economics concept where people rely too heavily on the first piece of information encountered when making decisions?

Answer: Anchoring

Anchoring occurs when an individual relies too heavily on an initial piece of information (the anchor) when making subsequent judgments or estimates.

What is 'nudge theory' as applied in public policy economics?

Answer: Designing choice environments to guide people toward better decisions without restricting options

Nudge theory, popularized by Thaler and Sunstein, involves structuring choice architectures so that people are steered toward beneficial decisions while retaining freedom of choice.