Behavioural economics attempts to understand the effect of individual psychological processes, including emotions, norms and habits on decision-making. Here, we provide a behavioural economics glossary of the most commonly used jargon.

Biases

Are a systematic (non-random) error in thinking, in the sense that a judgment deviates from what would be considered desirable from the perspective of accepted norms or correct in terms of formal logic.

Heuristics

Heuristics, which are commonly defined as cognitive shortcuts or rules of thumb that simplify decisions, represent a process of substituting a difficult question with an easier one. Eg choosing a brand you’ve used before.

Nudges

The term Nudge was coined by Prof. Richard Thaler and Prof. Cass Sunstein in their brilliant 2008 book ‘Nudge: Improving Decisions About Health, Wealth and Happiness’.

A Nudge, as they define it, is when options are presented to people that alter their behaviour in a predictable way without forbidding any options or significantly changing their economic incentives (i.e. not based heavily on price).

To count as a Nudge, the intervention must be easy and cheap. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not. Those who design the environment in which decisions are made are known as a ‘Choice Architects’.

Behavioural economics glossary

Here, we’ve defined some of the most common biases.

ANCHORING
We use benchmarks to evaluate options, no matter how arbitrary the anchors may be.

AUTHORITY BIAS
An irrational trust in the judgement of experts.

BIZARRENESS EFFECT
Things that are bizarre (especially those that are incongruous – out of context) stand out and are more memorable.

CHOICE REJECTION
Too much choice is overwhelming and procrastination pervades.

CHUNKING
Complex tasks are more appealing when “chunked’ into manageable pieces and affects how motivated we are to start and finish them.

COMMITMENT – PERSONAL INVESTMENT
The more committed we are in creating something the better we feel about it.

COMMITMENT – THE PUBLIC PLEDGE
The more public our stance the less willing we are to change it.

CONSISTENCY
Behaving in accordance to self image, but it can be influenced.

DECOY EFFECTS
Existence of an inferior/less desirable option makes a brand/product more likely to be chosen.

DISCOUNTING TOMORROW/HYPERBOLIC DISCOUNTING
An irrational emphasis on what matters today, preference for immediate payoffs.

FOLLOW THE HERD
People tend to do what others are doing.

FRAMING
How something is framed e.g. described affects perception of value.

GOAL DILUTION
Only focus on one thing at a time. Use small easy achievable steps.

GOAL GRADIENT EFFECT
When we feel we are close to reaching a goal, our efforts toward that goal increase.

HOT STATE DECISION MAKING
We make impulse purchases based on triggers (e.g. smell of bread makes us feel hungry)

LOSS AVERSION
In life losses are twice as powerful as gains, we place undue emphasis on what I have already done/have.

MENTAL ACCOUNTING
We don’t like to ‘do the maths’, so make it easy for us, short cuts

POWER OF FREE
If something’s priced at zero, it’s much more attractive than any other price, no matter how low.

PRIMACY & RECENCY EFFECT
When given a list of information and later asked to recall it, the items at the beginning (primacy) and the end (recency) are more likely to be recalled than the items in the middle.

PRIMING
Behaviour influenced by cues that work subconsciously. E.g. Music influencing wine choice.

RECIPROCITY
After receiving a gift or positive action, people often respond by providing something in return.

REPRESENTATIVENESS
Using stereotyping to provide mental shortcuts – eg colour.

SCARCITY
Something we perceive to be scarce is felt to have greater value.

STATUS QUO BIAS
People are very committed to keeping things the way they are.

SUBCONSCIOUS VALUE ACTIVATION
We respond to emotional triggers e.g. fear, love, excitement, anger.

SOCIAL INCENTIVES
Social reward can be of greater value than money.

VALUE PERCEPTION
Price dictates how you value something, even when applied to seemingly identical products.

You can find out how behavioural understanding can be applied to marketing in our new report: Applying behavioural economics to marketing – 7 cognitive biases you can leverage today.