Enhance Your Learning with Economics - Bounded Rationality Flash Cards for quick understanding
The concept that individuals have limited cognitive abilities and information when making decisions, leading to deviations from perfect rationality.
Mental shortcuts or rules of thumb used by individuals to simplify decision-making and problem-solving, often leading to biases and errors.
Systematic deviations from rationality caused by cognitive biases, such as confirmation bias, availability heuristic, and overconfidence bias.
The constraints on human cognition that prevent individuals from fully processing and analyzing all available information, leading to bounded rationality.
Theoretical frameworks and models used to understand and analyze the decision-making process, including rational choice theory and behavioral economics.
The concept of making decisions that maximize expected utility, based on complete and accurate information, without being influenced by biases or emotions.
Deviation from rational decision-making, often influenced by cognitive biases, emotions, and limited information processing capabilities.
The study of how psychological, cognitive, and emotional factors influence economic decision-making and behavior, challenging traditional economic assumptions.
A behavioral economic theory that describes how individuals make decisions under uncertainty, emphasizing the role of loss aversion and reference points.
A cognitive bias where individuals rely heavily on an initial piece of information (the anchor) when making decisions, even if it is irrelevant or arbitrary.
A mental shortcut where individuals judge the likelihood of an event based on how easily they can recall or imagine similar instances, often leading to biases.
The tendency to search for, interpret, and favor information that confirms one's preexisting beliefs or hypotheses, while ignoring or discounting contradictory evidence.
The tendency to continue investing time, money, or resources into a project or decision, even when it is no longer rational, due to the perceived irrecoverable costs already incurred.
The tendency to prefer avoiding losses over acquiring equivalent gains, leading individuals to make irrational decisions to avoid potential losses.
The influence of how information is presented or framed on individuals' decisions and judgments, often leading to different choices based on the wording or context.
The tendency to overestimate one's own abilities, knowledge, or performance, leading to overconfident decisions and underestimation of risks.
The preference for maintaining the current state of affairs or sticking to the default option, even when better alternatives are available, due to aversion to change.
The tendency to value an item or resource more highly once it is owned or possessed, leading to irrational attachment and reluctance to give it up.
The tendency of individuals to follow the actions or decisions of a larger group, often leading to irrational behavior and market inefficiencies.
A concept in behavioral economics that suggests positive reinforcement and indirect suggestions can influence individuals' decisions and behaviors without restricting their freedom of choice.
The design of the decision-making environment or context that influences individuals' choices, often used to nudge individuals towards certain decisions or behaviors.
A time-inconsistent preference where individuals have a stronger preference for immediate rewards over larger but delayed rewards, leading to suboptimal decision-making.
The tendency of individuals to have different preferences or choices at different points in time, often leading to self-control problems and irrational decisions.
The tendency of individuals to mentally categorize and treat money or resources differently based on their source, purpose, or past transactions, leading to irrational financial decisions.
The tendency to avoid making decisions that may result in regret or disappointment, often leading to suboptimal choices and missed opportunities.
The concepts of fairness and equity in economic decision-making, including perceptions of distributive justice and the willingness to sacrifice personal gain for fairness.
A game in experimental economics where one player proposes a division of a sum of money, and the other player can either accept or reject the offer. If rejected, both players receive nothing.
A game in experimental economics where one player (the dictator) decides how to divide a sum of money between themselves and another player, who has no say in the decision.
A classic game theory scenario where two individuals, acting in their own self-interest, fail to cooperate and achieve the optimal outcome due to the presence of conflicting incentives.
A situation in which individuals, acting independently and rationally, deplete or degrade a shared resource, leading to negative outcomes for all involved.
A dilemma in which individuals have an incentive to free-ride and not contribute to the provision of a public good, leading to underprovision and suboptimal outcomes.
The issue of individuals benefiting from a public good or collective action without contributing their fair share, leading to underprovision and inefficiency.
The use of rewards, punishments, or other incentives to influence individuals' behavior and decision-making, often used to align interests and promote desired outcomes.
The risk that individuals or organizations may take greater risks or engage in reckless behavior due to the presence of insurance or protection against negative consequences.
A conflict of interest between a principal (e.g., a company owner) and an agent (e.g., an employee) who is entrusted to act on behalf of the principal, often leading to agency costs and suboptimal outcomes.
A situation where one party in a transaction has more or better information than the other party, leading to imbalances in power, adverse selection, and moral hazard.
A situation where one party in a transaction has more information or knowledge about the quality or characteristics of a product or service, leading to market inefficiencies and suboptimal outcomes.
A theory in economics that explains how individuals or firms can convey credible information about their quality or abilities to others, reducing information asymmetry and improving market outcomes.
The application of bounded rationality concepts to understand and analyze market behavior, including deviations from perfect rationality and the impact on market efficiency.
A theory in finance that suggests financial markets are efficient and reflect all available information, making it difficult to consistently outperform the market through active trading or investment strategies.
A situation where the prices of assets or securities rise rapidly and exceed their intrinsic value, often driven by investor psychology, speculation, and herd behavior.
The tendency of investors to follow the actions or decisions of a larger group, often leading to market bubbles, excessive volatility, and mispricing of assets.
A theory in economics that suggests individuals form expectations about future events or outcomes based on all available information, including past experiences and market signals.
The factors or constraints that prevent arbitrageurs from fully exploiting mispricings or market inefficiencies, such as transaction costs, short-selling restrictions, and information asymmetry.
An interdisciplinary field that combines principles of psychology and economics to understand and explain deviations from rational financial decision-making and market behavior.
A branch of economics that uses controlled experiments to study economic behavior and test economic theories, often focusing on decision-making under different conditions and incentives.
An interdisciplinary field that combines principles of neuroscience, psychology, and economics to study how the brain processes economic information and influences decision-making.
The practical implications and real-world applications of bounded rationality concepts in various fields, including public policy, marketing, finance, and organizational behavior.