More Behavioral Science Concepts





There are numerous concepts in behavioral economics and they don't always fit neatly together. Some additional important concepts, besides heuristics and biases, are described briefly below:



Prospect theory

In 1979, Kahneman & Tversky showed that our willingness to take risks is influenced by how the choices are framed as well as the context.


Below is a classic decision problem:


Choose a preference for each Question:


Question 1:

A) A sure win of $250, or B) A 25% chance to win $1000 and a 75% chance to win nothing?


Question 2: A) A sure loss of $750, versus B) A 75% chance to lose $1000 and a 25% chance to lose nothing?


Tversky and Kahneman’s work shows that people's responses change depending on whether the questions are framed as a gain or a loss.


In general, people will choose A) in Question 1 and B) Question 2, because we tend to dislike losses more than we like the equivalent gains.



Bounded rationality

This is the idea that people do not always make "rational" decisions. The rationality of a decision is often influenced by one's environment and also by limited human information processing capabilities, knowledge, information, and computational capacities.


Heuristics and biases (see other articles for more information) can help describe some of this "irrationality".


Bounded rationality is also tied to the following concepts:


Mental accounting: We spend money differently depending on how we earned it, how we intend to use it, and how it makes us feel. Also related to mental accounting is the idea that we are loss averse and experience pain of paying (Zellermayer, 1996),


Choice overload:

When there are no many choices at hand, people may experience "decision fatigue" and consequently go with the default option (when available) or avoid making a decision altogether.


Limited information:

In their book Nudge, Thaler and Sunstein describe how our decisions are often made with limited knowledge or information. They point out that people can make better decisions when feedback is prompt, positive, and personalized.


Information avoidance:

Information avoidance in behavioral economics (Golman et al., 2017) refers to situations when people choose not to obtain knowledge that is freely available. Such avoidance is typically negative in the long term, as it deprives people of information that is potentially useful for making decisions. Information avoidance can also contribute to a polarization of political opinions and media bias.



Temporal dimensions

The idea behind temporal dimensions in behavioral economics is that people are biased towards the present and poor predictors of future experiences, perceptions of value, and behavior.


Time Discounting

Evidence shows that present rewards are weighted more heavily than future

ones. Once rewards are very distant in time, they stop having value for us.

In hyperbolic discounting, values placed on rewards decrease very quickly for

small delay periods and fall more slowly for longer delays (Laibson, 1997).

Diversification Bias and Empathy Gap

Time inconsistency also occurs when we fail to accurately predict our future

preferences. This can be seen in the diversification bias, which describes

how people tend to seek more variety when simultaneously choosing

multiple things to eat than when making choices sequentially. The empathy

gap explains our inability to fully appreciate the effects of emotional and

physiological states on our decision making.


Forecasting and Memory

When we make plans for the future, we tend to be overly optimistic. For

example, we tend to underestimate how long it will take us to complete a

task (planning fallacy) and ignore past experience (Kahneman, 2011).


Memories are also often not as reliable as we think. We may evaluate our

last encounter with someone for example, based on the most pleasurable

aspects and the goodbye, rather than the average of the experience (known

as the peak-end rule, Kahneman & Tversky, 1999).



Social

Behavioral economics does not assume that we make choices in isolation, or only to serve our own interests, but that social factors are very important in decision making. Social dimensions include aspects such as trust, dishonesty, fairness, reciprocity, social norms, consistency, and herd behavior.


Fairness and reciprocity

Behavioral game theory takes into account factors such as how players feel

about the payoffs others receive, and tend to be about cooperation and

fairness. Regular game theory, on the other hand, makes an assumption of

homo economicus – or that people are consistently rational and self-

interested.

Social norms

Social norms are "implicit or explicit behavioral expectations or rules within

a society or group of people" (Dolan et al., 2010). Our preferences do not

simply reflect our tastes, but they also often influenced by norms.




For more complete information or a guide, you can check out behavioraleconomics.com