​​​​​​​​​OVERVIEW OF BEHAVIORAL ECONOMICS CONCEPTS

WITH QUOTES FROM THOSE WHO SAID IT BEST


Anchoring Bias                  

  • Reference points matter.  Anchoring is the common tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions, regardless of whether it’s a logically relevant reference or not.  
  • During normal decision-making, individuals tend to overly rely on specific information or a specific value and then adjust to that value to account for other elements of the circumstance.  Once an anchor is set, people tend to be biased towards that value.  (e.g., when you think about some quantity, like the manufacturers’ suggested retail price of an item, the first number that gets mentioned has an enormous impact on the way that people think.)
  • “…you should assume that any number that is on the table has had an anchoring effect on you, and if the stakes are high you should mobilize yourself …to combat the effect.” ― Daniel Kahneman


Availability Bias               

  • The tendency to estimate what is more likely based on what is available in memory. This is biased toward vivid, unusual, or emotionally charged examples.
  • "Memory is deceptive because it is coloured by today's events." — Albert Einstein 


Bandwagon / Herding Effect

  • The tendency to base actions and beliefs on the perception of what other people are doing or believing.  Related to groupthink and herd behaviour.         
  • “If everyone is thinking alike, then somebody isn’t thinking.” — George S. Patton


Choice Bracketing           

  • People tend to break down complex problems into simpler ones that require less cognitive ability.
  • People tend to spend /consume less from multiple small pots than one large pot.
  • An army General who focuses only on the battle at hand (narrow bracketing) might lose sight of winning the war (broad bracketing).
  • Sometimes by losing a battle you find a new way to win the war.” — Donald Trump


Confirmation Bias           

  • The tendency to search for, interpret and remember information in a way that confirms one's preconceptions.  Once you have made a decision, you look for signs that you made the right decision and attribute more weight to the factors that support your decision (you view information in such a way that it supports those preferences).  
  • “Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.”  — John Kenneth Galbraith


Endowment Effect           

  • We overvalue what we own or make ourselves. 
  • Once people own things -- or have “invested” in making a decision – the perception of its value increases, making it harder to walk away. 
  • Essentially, people are strongly inclined to assign a higher value to things that they themselves own than they would to identical items in the market.
  • “One man’s ceiling is another man’s floor.”  — Song by Paul Simon 


Framing Effect  

  • Drawing different conclusions from the same information, depending on how or by whom that information is presented.           
  • Framing effects exist when different description of the same situation yield different judgments.
  • "An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can't easily recognize that they are the same."  — Daniel Kahneman


Halo Effect

  • The tendency for a person's positive or negative traits to "spill over" from one personality area to another in others' perceptions of them.
  • “Nobody would say, 'I'm voting for this guy because he's got the stronger chin,' but that, in fact, is partly what happens.”  — Daniel Kahneman


Hindsight Bias 

  • Sometimes called the "I-knew-it-all-along" or “Monday morning quarterback” effect.
  • The tendency to see past events as being predictable at the time those events happened.
  • Canadian Courts have recognized the existence of the Hindsight Bias and have introduced rules to counterbalance it when evaluating the reasonableness or prudence of decisions made by corporate officers and directors, after events have gone sour.
  • “…courts should be careful not to rely upon the perfect vision afforded by hindsight.” — Supreme Court of Canada Justice L'Heureux‑Dubé J. in Lapointe v. Hôpital Le Gardeur, [1992] 1 SCR 351 


Present Bias / Hyperbolic Discounting       

  • The tendency to prefer smaller payoffs now over larger payoffs later, which leads one to largely disregard the future when it requires sacrifices in the present. It describes our tendency for immediate gratification at the expense of the future.   
  • People often make short-sighted decisions that favour present consumption over future consumption, even if present consumption is disadvantageous in the long run. 
  • “I never get enough sleep. I stay up late at night, cause I’m Night Guy. Night Guy wants to stay up late. ‘What about getting up after five hours sleep?’, Oh that’s Morning Guy’s problem. That’s not my problem, I’m Night Guy.” — Jerry Seinfeld

 
Information Overload / Choice Overload            

  • We assume that information and education will aid consumer in making better choices; instead, too much information often leads to a feeling of helplessness and inaction.

  • People often find decision-making an overwhelming process.  Presented with too many choices, people tend to feel overwhelmed and don’t know what to choose, thereby making it more likely they will make no choice at all or defer a decision.

  • A brain is a lot like a computer. It will only take so many facts, and then it will go on overload and blow up.”  — Erma Bombeck

 
Loss Aversion  

  • People will go to great lengths to avoid feeling a loss.   Losses are typically twice as powerful as gains.
  • Loss aversion is a common psychological barrier that deters sales and prevents people from realizing losses. Research has shown that people are more strongly inclined to avoid losses than they are to seek gains. The emotional “pain” people experience from a loss is mentally greater than the benefit a person feels from an equivalent gain.
  • “I hate losing…I hate it. I hate losing more than I even want to win.”  — Brad Pitt as Billy Beane in “Moneyball


Mental Accounting / Bucketing    
        

  • People tend to divide money into different categories and assign different values to it, overlooking the fact that a dollar is a dollar.

  • “People – consumers like you and me – spend money differently as a function of how we earn it, what we plan to spend it for, what physical form it takes, and what payment method we use.” Dilip Soman, The Last Mile

 
Optimism Bias 

  • The tendency to be over-optimistic, overestimating favourable and pleasing outcomes.
  • Also known as the “Above Average Effect” or the “Lake Wobegon Effect”, after the public radio program A Prairie Home Companion, set in the fictional town of Lake Wobegon.
  • “All the women are strong, all the men are good looking, and all the children are above average.”  — Garrison Keillor writing about the Lake Wobegon Effect

 
Overconfidence Effect   

  • People believe that their knowledge and ability exceed their actual knowledge and abilities. 
  • People tend to have excessive confidence in their own answers to questions. For example, studies have shown 93% of people believe themselves to be above average drivers.  
  • Studies have also revealed significant overconfidence in the judgments of doctors, scientists, engineers and lawyers. 
  • “People exaggerate their own skills. they are optimistic about their prospects and overconfident about their guesses, including which managers to pick.” — Richard Thaler

 
Representativeness Heuristic              

  • Where people judge the probability or frequency of a hypothesis by considering how much the hypothesis resembles available data.   
  • For example, when a person tosses a coin and experiences a sequence of 5 consecutive heads, they might expect the coin is “due” to land on tails on the next flip; yet the odds of the coin landing on either heads or tails remain at 50-50% for each toss. 
  • “Almost everyone's instinct is to be overconfident and read way too much into a hot or cold streak.” —  Nate Silver


Regret Aversion               

  • People exhibiting regret aversion avoid taking decisive actions because they fear that, in hindsight, whatever course they select will prove less than optimal.
  • “Never do today what you can do tomorrow. Something may occur to make you regret your premature action.”  — U.S. Vice President, Aaron Burr, who shot and killed Treasury Secretary Alexander Hamilton in a duel without regret.

 
Status Quo Bias

  • People are very likely to continue a course of action since it has been traditionally the one pursued, even though this course of action may clearly not be in their best interest.
  • Once a default option is set, it tends to stick.
  • Status Quo bias is related to Omission bias:  when a decision-maker prefers a harmful outcome that results from an omission to a less harmful outcome that results from an action
  • “Every body continues in its state of rest, or of uniform motion in a right line, unless it is compelled to change that state by forces impressed upon it.” — Sir Isaac Newton