Behavioural Economics Vocabulary Quiz

A nudge is a subtle change in the way choices are presented that influences people's behaviour without forbidding any options or significantly changing their economic incentives. Popularised by Thaler and Sunstein, examples include placing healthy food at eye level in a canteen or setting organ donation as opt-out rather than opt-in.

A heuristic is a mental shortcut or rule of thumb used to make decisions quickly when facing complex choices with limited information or time. While heuristics often produce good results, they can lead to systematic errors called cognitive biases. Common examples include the availability heuristic and the representativeness heuristic.

Loss aversion is the tendency to feel the pain of a loss more strongly than the pleasure of an equivalent gain. Research by Kahneman and Tversky found that losses are felt approximately twice as powerfully as equivalent gains. This can lead to holding losing investments too long or refusing to take risks even when gains far outweigh potential losses.

Anchoring is a cognitive bias in which people rely heavily on the first piece of information they encounter (the anchor) when making decisions. Subsequent judgements adjust from that initial value, often insufficiently. Anchoring is widely used in pricing and negotiation to influence perceived value.

The default effect is the tendency for people to accept the pre-set option rather than making an active choice to change it. Auto-enrolling employees in pension schemes (opt-out) dramatically increases participation compared to opt-in schemes. The effect arises because changing a default requires effort and people are loss-averse about deviating from the perceived norm.

Bounded rationality, introduced by Herbert Simon, refers to the fact that people's rational decision-making is limited by available information, cognitive capacity and time. Rather than optimising, people 'satisfice' — they find an option that is good enough and stop searching. It is a foundational concept challenging classical economics' assumption of the perfectly rational agent.

Framing refers to how the presentation of information affects people's choices. The same facts can lead to different decisions depending on whether information is presented positively or negatively. For example, '90% fat-free' is perceived more favourably than '10% fat', though they are identical. Framing effects are central to public health communication and marketing.

The sunk cost fallacy is the tendency to continue investing in something because of past investment — even when continuing is no longer rational. A rational agent should ignore sunk costs (which cannot be recovered) and consider only future costs and benefits. Examples include continuing to watch a bad film because you paid for the ticket.

Status quo bias is the preference for the current state of affairs and reluctance to change. Because people perceive any change as a potential loss, and losses feel more significant than gains, they tend to stick with defaults even when changing would benefit them. This bias helps explain consumer inertia and organisational resistance to change.

In behavioural economics, scarcity refers to the psychological state of having less than needed. Research shows scarcity captures mental bandwidth, impairing cognitive function and promoting short-term thinking. Scarcity is also used in marketing to create urgency (e.g., 'only 2 left in stock') and drive purchasing decisions.