In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are contrasted with prospective costs, which are future costs that may be avoided if action is taken. In other words, a sunk cost is a sum paid in the past that is no longer relevant to decisions about the future. Even though economists argue that sunk costs are no longer relevant to future rational decision-making, people in everyday life often take previous expenditures in situations, such as repairing a car or house, into their future decisions regarding those properties.
Behavioral economics is the study of the psychological, cognitive, emotional, cultural and social factors involved in the decisions of individuals or institutions, and how these decisions deviate from those implied by classical economic theory.
Prospect theory is a theory of behavioral economics, judgment and decision making that was developed by Daniel Kahneman and Amos Tversky in 1979. The theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics.
Decision theory is a branch of applied probability theory and analytic philosophy concerned with the theory of making decisions based on assigning probabilities to various factors and assigning numerical consequences to the outcome.
The St. Petersburg paradox or St. Petersburg lottery is a paradox involving the game of flipping a coin where the expected payoff of the lottery game is infinite but nevertheless seems to be worth only a very small amount to the participants. The St. Petersburg paradox is a situation where a naïve decision criterion that takes only the expected value into account predicts a course of action that presumably no actual person would be willing to take. Several resolutions to the paradox have been proposed, including the impossible amount of money a casino would need to continue the game indefinitely.
The expected utility hypothesis is a foundational assumption in mathematical economics concerning decision making under uncertainty. It postulates that rational agents maximize utility, meaning the subjective desirability of their actions. Rational choice theory, a cornerstone of microeconomics, builds this postulate to model aggregate social behaviour.
A status quo bias is a cognitive bias which results from a preference for the maintenance of one's existing state of affairs. The current baseline is taken as a reference point, and any change from that baseline is perceived as a loss or gain. Corresponding to different alternatives, this current baseline or default option is perceived and evaluated by individuals as a positive.
Cass Robert Sunstein is an American legal scholar known for his work in constitutional law, administrative law, environmental law, and behavioral economics. He is also The New York Times best-selling author of The World According to Star Wars (2016) and Nudge (2008). He was the administrator of the White House Office of Information and Regulatory Affairs in the Obama administration from 2009 to 2012.
Libertarian paternalism is the idea that it is both possible and legitimate for private and public institutions to affect behavior while also respecting freedom of choice, as well as the implementation of that idea. The term was coined by behavioral economist Richard Thaler and legal scholar Cass Sunstein in a 2003 article in the American Economic Review. The authors further elaborated upon their ideas in a more in-depth article published in the University of Chicago Law Review that same year. They propose that libertarian paternalism is paternalism in the sense that "it tries to influence choices in a way that will make choosers better off, as judged by themselves" ; note and consider, the concept paternalism specifically requires a restriction of choice. It is libertarian in the sense that it aims to ensure that "people should be free to opt out of specified arrangements if they choose to do so". The possibility to opt out is said to "preserve freedom of choice". Thaler and Sunstein published Nudge, a book-length defense of this political doctrine, in 2008.
The outcome bias is an error made in evaluating the quality of a decision when the outcome of that decision is already known. Specifically, the outcome effect occurs when the same "behavior produce[s] more ethical condemnation when it happen[s] to produce bad rather than good outcome, even if the outcome is determined by chance."
Zero-risk bias is a tendency to prefer the complete elimination of risk in a sub-part over alternatives with greater overall risk reduction. It often manifests in cases where decision makers address problems concerning health, safety, and the environment. Its effect on decision making has been observed in surveys presenting hypothetical scenarios.
Choice architecture is the design of different ways in which choices can be presented to decision makers, and the impact of that presentation on decision-making. For example, each of the following:
Attribute substitution is a psychological process thought to underlie a number of cognitive biases and perceptual illusions. It occurs when an individual has to make a judgment that is computationally complex, and instead substitutes a more easily calculated heuristic attribute. This substitution is thought of as taking place in the automatic intuitive judgment system, rather than the more self-aware reflective system. Hence, when someone tries to answer a difficult question, they may actually answer a related but different question, without realizing that a substitution has taken place. This explains why individuals can be unaware of their own biases, and why biases persist even when the subject is made aware of them. It also explains why human judgments often fail to show regression toward the mean.
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value, often focusing on negative, undesirable consequences. Many different definitions have been proposed. One international standard definition of risk is the "effect of uncertainty on objectives".
Nudge: Improving Decisions about Health, Wealth, and Happiness is a book written by University of Chicago economist and Nobel Laureate Richard H. Thaler and Harvard Law School Professor Cass R. Sunstein, first published in 2008. In 2021, a revised edition was released, subtitled The Final Edition.
Heuristics is the process by which humans use mental shortcuts to arrive at decisions. Heuristics are simple strategies that humans, animals, organizations, and even machines use to quickly form judgments, make decisions, and find solutions to complex problems. Often this involves focusing on the most relevant aspects of a problem or situation to formulate a solution. While heuristic processes are used to find the answers and solutions that are most likely to work or be correct, they are not always right or the most accurate. Judgments and decisions based on heuristics are simply good enough to satisfy a pressing need in situations of uncertainty, where information is incomplete. In that sense they can differ from answers given by logic and probability.
Risk aversion is a preference for a sure outcome over a gamble with higher or equal expected value. Conversely, rejection of a sure thing in favor of a gamble of lower or equal expected value is known as risk-seeking behavior.
The discipline of forensic epidemiology (FE) is a hybrid of principles and practices common to both forensic medicine and epidemiology. FE is directed at filling the gap between clinical judgment and epidemiologic data for determinations of causality in civil lawsuits and criminal prosecution and defense.
Noise: A Flaw in Human Judgment is a nonfiction book by professors Daniel Kahneman, Olivier Sibony and Cass Sunstein. It was first published on May 18, 2021. The book concerns 'noise' in human judgment and decision-making. The authors define noise in human judgment as "undesirable variability in judgments of the same problem" and focus on the statistical properties and psychological perspectives of the issue.
Action bias is the psychological phenomenon where people tend to favor action over inaction, even when there is no indication that doing so would point towards a better result. It is an automatic response, similar to a reflex or an impulse and is not based on rational thinking. One of the first appearances of the term "action bias" in scientific journals was in a 2000 paper by Patt and Zechenhauser titled "Action Bias and Environmental Decisions", where its relevance in politics was expounded.
