Behavioral economics nudges and biases study guide

What is a nudge?

A nudge is a subtle intervention that encourages people to make decisions without restricting their choices.

True or False: Nudges limit consumer choices.

False. Nudges aim to influence decisions while preserving freedom of choice.

Provide an example of a default option nudge.

Automatically enrolling employees in retirement savings plans increases participation rates.

What is the purpose of a social norm nudge?

To influence behavior by showing what others are doing, e.g., energy use comparisons.

Fill in the blank: A __________ nudge uses visual cues to guide choices.

salience

Comparison: Active choice vs. default option.

Active choice requires individuals to select, while default options automatically set a choice unless changed.

What is a reminder nudge?

A reminder nudge prompts individuals to take action, like sending texts for bill payments.

Describe the impact of framing on decision-making.

Framing can change perceptions; decisions can differ when presented as gains vs. losses.

Cause → Effect: Providing easy access to information...

...leads to more informed decision-making, like clear labels on food products.

What is a commitment device?

A commitment device helps individuals stick to their goals, like pre-committing funds for savings.

True or False: Nudges are always financial incentives.

False. Nudges can be non-financial, like altering the environment to promote healthier choices.

What is the role of choice architecture?

Choice architecture shapes how choices are presented, influencing decisions, e.g., menu design in cafeterias.

Provide an example of a scarcity nudge.

Limiting the supply of a product can create urgency, prompting quicker purchasing decisions.

Fill in the blank: A __________ nudge uses feedback to motivate changes.

feedback

What is an example of a decoy effect?

Introducing a less attractive option can make a desired option seem more appealing, such as in pricing strategies.

What is the impact of personalizing nudges?

Personalization increases relevance, making nudges more effective in influencing behavior.

Confirmation Bias → Definition

The tendency to search for, interpret, and remember information that confirms one’s pre-existing beliefs.

True or False: Anchoring Bias affects initial decision-making.

True. Anchoring bias occurs when individuals rely too heavily on the first piece of information encountered.

Loss Aversion → Explanation

The principle that losses loom larger than gains; people prefer to avoid losses rather than acquiring equivalent gains.

Fill in the blank: The __________ effect explains why people prefer a smaller reward now than a larger reward later.

present bias

Sunk Cost Fallacy → Description

The tendency to continue investing in a losing proposition due to previously invested resources (time, money).

Overconfidence Bias → What does it affect?

It affects individuals' assessment of their skills, knowledge, and ultimately leads to poor economic decisions.

Comparison of two biases: Hindsight Bias vs. Overconfidence Bias

Hindsight bias is believing an event was predictable after it happened, while overconfidence bias is overestimating one's own abilities.

Example of Status Quo Bias

A person continues to use an old bank account rather than switching to one with better interest rates.

Framing Effect → Definition

The way information is presented influences decision-making; different presentations can lead to different choices.

True or False: The Optimism Bias leads to a pessimistic view of future events.

False. Optimism bias leads individuals to believe they are less likely to experience negative events than others.

Availability Heuristic → Describe the effect.

Relying on immediate examples that come to mind when evaluating a topic, often leading to skewed perceptions.

Example of Planning Fallacy

Underestimating the time and costs required to complete a project due to overly optimistic forecasting.

True or False: The Bandwagon Effect is about individual decision-making.

False. It describes how individuals adopt behaviors or beliefs because others are doing so.

Endowment Effect → What is it?

The phenomenon where people assign higher value to items they own compared to identical items they do not own.

Choice Overload → Definition

The state where too many options lead to difficulty in making a decision, often resulting in dissatisfaction.

Self-Serving Bias → Describe its impact.

The tendency to attribute positive events to personal factors and negative events to external factors.

What is a default option in retirement plans?

Employees are automatically enrolled in a retirement plan unless they opt out, leading to higher participation rates.

True or False: Nudges can reduce organ donation rates.

False - Opt-out systems for organ donation increase participation significantly.

Example of loss aversion in marketing?

Free trials create a sense of loss if customers don't continue, encouraging purchases.

What influence do social norms have on behavior?

People often conform to what they perceive as typical behaviors, such as energy usage.

Fill in the blank: Providing __________ leads to better health decisions.

information about calorie counts can help individuals make healthier food choices.

What is the impact of framing on decisions?

People react differently depending on whether options are framed as gains or losses.

Compare opt-in vs. opt-out organ donation systems.

Opt-in requires explicit consent; opt-out assumes consent unless stated otherwise, increasing donations.

Cause → Effect: Offering small rewards → ?

Increases participation in healthy habits like exercise or vaccination.

What is a commitment device?

A tool that helps individuals stick to their goals by imposing constraints, like financial penalties.

True or False: People are influenced by scarcity.

True - Scarcity creates a sense of urgency, driving demand and perceived value.

Example of choice architecture in grocery stores?

Placing healthy foods at eye level encourages healthier eating habits among shoppers.

What role do reminders play in decision-making?

Reminders can prompt timely actions, such as bill payments or vaccinations, increasing follow-through.

Fill in the blank: Using __________ can enhance savings behavior.

automated contributions to savings accounts leads to increased savings.

What effect does peer influence have on spending?

Individuals often adjust their spending habits based on their peers' behaviors, leading to increased consumption.

Example of a nudge in public policy?

Sending tax reminders can increase on-time payments by leveraging behavioral insights.

Cause → Effect: Presenting options sequentially → ?

Can lead to better decision-making by reducing overwhelm from too many choices.