Lecture 1 concepts

Question 1

Homo economicus

Answer 1

An abstraction of humans as agents who are consistently rational and logical, narrowly self-interested, and maximize/optimize profit and utility. These use their reason and apply the rules of logic.

Question 2

Gambler’s fallacy

Answer 2

When an individual erroneously believes that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events

Question 3

Cognitive bias

Answer 3

A systematic error in thinking that occurs when people are processing and interpreting information in the world around them and it affects the decisions and judgements that they make

Question 4

Heuristic (rule of thumb)

Answer 4

A mental shortcut commonly used to simplify problems and avoid cognitive overload

Question 5

Utility (prospect theory)

Answer 5

Small profit is valued a lot, but larger profit is not valued proportionally more. Similarly, small los is experienced as very annoying, while a larger loss is not experienced proportionally worse.

Question 6

System 1 (Kahneman)

Answer 6

Around 95% of our decisions. Contains decisions that are made automatically, intuitively and with little effort, driven by instinct and our experiences.

Question 7

System 2 (Kahneman)

Answer 7

Around 5% of our decisions. Contains decisions that are slower and require more effort. They are conscious and logical but take time.