Behavioural Economics Vocabulary in English

Behavioural economics is a field that combines insights from psychology and economics to understand how people actually make decisions, rather than how they theoretically should. Traditional economics assumes people are rational actors who always maximise their self-interest. Behavioural economics shows that real decisions are influenced by cognitive biases, emotions, social norms, and mental shortcuts.

Loss aversion is the tendency to experience the pain of a loss more intensely than the pleasure of an equivalent gain. Research by Kahneman and Tversky showed that the psychological impact of losing £100 is roughly twice as powerful as the pleasure of gaining £100. This insight has profound implications for marketing, investment behaviour, public policy, and negotiation.

A nudge is any aspect of the choice environment that alters people’s behaviour in a predictable way without forbidding any options or significantly changing financial incentives. Examples include placing fruit at eye level in a cafeteria, setting pension auto-enrolment as the default, or sending reminder texts before medical appointments. Nudges are used by governments worldwide to promote healthier, more sustainable behaviour.

A heuristic is a mental shortcut that helps people make decisions quickly and efficiently. Most of the time, heuristics work well enough. A cognitive bias is a systematic error that results when a heuristic is applied in a situation where it leads to a predictably wrong or distorted judgement. For example, using the availability heuristic (judging probability by how easily examples come to mind) leads to the availability bias when dramatic events are overestimated simply because they are memorable.

The sunk cost fallacy is the tendency to continue an endeavour because of previously invested resources (time, money, or effort), even when continuing no longer makes rational sense. For example, staying at a bad film to the end because you paid for the ticket, or continuing to fund a failing project because the company has already spent large sums on it. Rational decision-making requires ignoring sunk costs and focusing only on future costs and benefits.

Anchoring is the cognitive bias where people rely too heavily on the first piece of information they encounter when making a decision. For example, if a product is first shown at a high price and then discounted, the original high price acts as an anchor, making the discounted price seem like exceptional value. Retailers, negotiators, and marketers routinely exploit anchoring effects.

Choice architecture refers to the way choices are presented to decision-makers. The arrangement of options, default settings, and the order in which choices are displayed can all powerfully influence which option is selected. Choice architects design environments to make certain outcomes more likely — for example, by making organ donation the default option on driving licence applications or placing the salad bar at the entrance of a canteen.

Prospect theory, developed by Daniel Kahneman and Amos Tversky, describes how people evaluate potential losses and gains asymmetrically. People do not evaluate outcomes in absolute terms but relative to a reference point. Losses generate greater psychological impact than equivalent gains, and people are risk-averse when it comes to gains but risk-seeking when it comes to avoiding losses. Prospect theory was central to Kahneman winning the Nobel Prize in Economics in 2002.

Hyperbolic discounting is the tendency to prefer smaller, immediate rewards over larger, delayed ones to a degree that is not strictly rational. People often say they prefer £10 now to £15 next month, but would happily wait if the choice were £10 in twelve months versus £15 in thirteen months. This inconsistency in time preferences helps explain procrastination, undersaving, and difficulties with long-term commitment.

Behavioural economics vocabulary appears in a wide range of academic, professional, and popular texts in English. Business school case studies, policy papers, journalism, and bestselling books by Kahneman and Thaler all use this terminology. For IELTS, C1 Advanced, and proficiency exam candidates, as well as professionals in business, marketing, and public policy, command of this vocabulary is increasingly essential.