Bounded rationality is the idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal.
Daniel Kahneman was an Israeli-American psychologist best-known for his work on the psychology of judgment and decision-making as well as behavioral economics, for which he was awarded the 2002 Nobel Memorial Prize in Economic Sciences together with Vernon L. Smith. Kahneman's published empirical findings challenge the assumption of human rationality prevailing in modern economic theory. Kahneman became known as the "grandfather of behavioral economics."
Amos Nathan Tversky was an Israeli cognitive and mathematical psychologist and a key figure in the discovery of systematic human cognitive bias and handling of risk.
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.
The representativeness heuristic is used when making judgments about the probability of an event being representional in character and essence of a known prototypical event. It is one of a group of heuristics proposed by psychologists Amos Tversky and Daniel Kahneman in the early 1970s as "the degree to which [an event] (i) is similar in essential characteristics to its parent population, and (ii) reflects the salient features of the process by which it is generated". The representativeness heuristic works by comparing an event to a prototype or stereotype that we already have in mind. For example, if we see a person who is dressed in eccentric clothes and reading a poetry book, we might be more likely to think that they are a poet than an accountant. This is because the person's appearance and behavior are more representative of the stereotype of a poet than an accountant.
The conjunction fallacy is an inference that a conjoint set of two or more specific conclusions is likelier than any single member of that same set, in violation of the laws of probability. It is a type of formal fallacy.
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.
Richard H. Thaler is an American economist and the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. In 2015, Thaler was president of the American Economic Association.
The planning fallacy is a phenomenon in which predictions about how much time will be needed to complete a future task display an optimism bias and underestimate the time needed. This phenomenon sometimes occurs regardless of the individual's knowledge that past tasks of a similar nature have taken longer to complete than generally planned. The bias affects predictions only about one's own tasks. On the other hand, when outside observers predict task completion times, they tend to exhibit a pessimistic bias, overestimating the time needed. The planning fallacy involves estimates of task completion times more optimistic than those encountered in similar projects in the past.
The simulation heuristic is a psychological heuristic, or simplified mental strategy, according to which people determine the likelihood of an event based on how easy it is to picture the event mentally. Partially as a result, people experience more regret over outcomes that are easier to imagine, such as "near misses". The simulation heuristic was first theorized by psychologists Daniel Kahneman and Amos Tversky as a specialized adaptation of the availability heuristic to explain counterfactual thinking and regret. However, it is not the same as the availability heuristic. Specifically the simulation heuristic is defined as "how perceivers tend to substitute normal antecedent events for exceptional ones in psychologically 'undoing' this specific outcome."
The Allais paradox is a choice problem designed by Maurice Allais to show an inconsistency of actual observed choices with the predictions of expected utility theory. The Allais paradox demonstrates that individuals rarely make rational decisions consistently when required to do so immediately. The independence axiom of expected utility theory, which requires that the preferences of an individual should not change when altering two lotteries by equal proportions, was proven to be violated by the paradox.
Michael Monroe Lewis is an American author and financial journalist. He has also been a contributing editor to Vanity Fair since 2009, writing mostly on business, finance, and economics. He is known for his nonfiction work, particularly his coverage of financial crises and behavioral finance.
The Paradox of Choice – Why More Is Less is a book written by American psychologist Barry Schwartz and first published in 2004 by Harper Perennial. In the book, Schwartz argues that eliminating consumer choices can greatly reduce anxiety for shoppers. The book analyses the behavior of different types of people. This book argues that the dramatic explosion in choice—from the mundane to the profound challenges of balancing career, family, and individual needs—has paradoxically become a problem instead of a solution and how our obsession with choice encourages us to seek that which makes us feel worse.
Reference class forecasting or comparison class forecasting is a method of predicting the future by looking at similar past situations and their outcomes. The theories behind reference class forecasting were developed by Daniel Kahneman and Amos Tversky. The theoretical work helped Kahneman win the Nobel Prize in Economics.
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.
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.
Thinking, Fast and Slow is a 2011 popular science book by psychologist Daniel Kahneman. The book's main thesis is a differentiation between two modes of thought: "System 1" is fast, instinctive and emotional; "System 2" is slower, more deliberative, and more logical.
Illusion of validity is a cognitive bias in which a person overestimates their ability to interpret and predict accurately the outcome when analyzing a set of data, in particular when the data analyzed show a very consistent pattern—that is, when the data "tell" a coherent story.
