Smart Choices flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Bounded rationality

The principle that decision makers have limited attention, memory, and computational capacity, so they satisfice by choosing the first option meeting an acceptable threshold rather than searching for the optimum.

Expected value

The probability-weighted sum of all possible payoffs for an option. It is the appropriate criterion for repeated decisions when the decision maker is risk neutral.

Expected utility

The probability-weighted sum of the utilities of outcomes. It incorporates risk attitude, unlike expected value, and predicts choices under uncertainty better for one-off decisions.

Sunk cost

A cost already incurred and unrecoverable. It is irrelevant to the forward comparison of remaining options, because no future choice can change it.

Opportunity cost

The value of the best alternative forgone when a choice is made. Every option, including doing nothing, carries one and it belongs in the comparison.

Satisficing

A search rule in which the decision maker sets an aspiration level and stops at the first alternative that meets it, rather than evaluating all options exhaustively.

Problem statement

A concise description of the trigger, the gap between actual and desired state, and the decision owner. It should not presuppose a particular solution.

Loss aversion

The tendency for losses to feel larger than equivalent gains, so preferences reverse when the same outcome is framed as a loss rather than a gain.

Reference point

The benchmark against which outcomes are coded as gains or losses. It is set by the status quo, expectations, or social comparison, and it determines the frame.

Narrow framing

Treating each decision in isolation rather than as part of a portfolio. It can produce inconsistent risk attitudes and insufficient diversification across related choices.

Attribute framing

Describing the same attribute in positive or negative terms, such as survival versus mortality rates. It reliably shifts evaluations of otherwise identical options.

Fundamental objectives

The outcomes a decision maker ultimately cares about, answering why a means matters. They anchor the criteria used to compare alternatives in a decision.

Means objectives

Instrumental goals that help achieve fundamental objectives, answering how something will be accomplished. They belong lower in the objectives hierarchy.

Dominated alternative

An option that is worse than another on at least one objective and no better on any other. It can be eliminated without any trade-off judgment.

Status quo alternative

The option of continuing current practice. It must be evaluated on the same criteria as all other alternatives to avoid biasing the decision toward change.

Value of information

The expected improvement in decision outcome from obtaining information, minus its cost. Information is worth acquiring only if it could change the choice.

Confirmation bias

The tendency to seek and interpret evidence that supports an existing belief while discounting contrary evidence. It is countered by actively searching for disconfirming data.

Anchoring

The tendency for an initial number, even an arbitrary one, to pull subsequent estimates toward it. Independent estimates formed before discussion reduce its effect.

Availability bias

Judging the frequency or likelihood of events by how easily examples come to mind. Vivid or recent events are overweighted relative to recorded base rates.

Regression to the mean

The statistical tendency for extreme results to be followed by less extreme ones when the underlying process is stable. It can be mistaken for an effect of intervention.

Bayes' rule

A formula updating a prior probability given new evidence: posterior equals likelihood times prior divided by the probability of the evidence. It structures belief revision.

Decision tree

A diagram of decision nodes, chance nodes, and payoffs, solved by backward induction. It makes sequential choices under uncertainty explicit and computable.

Certainty equivalent

The guaranteed amount a person would accept instead of a risky gamble. It lies below the expected value for risk-averse people and above it for risk-seeking people.

Sensitivity analysis

Testing whether plausible changes in key inputs would reverse the preferred option. A decision is robust when no realistic change flips the ranking.

Risk mitigation

Reducing exposure through avoidance, loss reduction, transfer such as insurance, or acceptance. Each measure costs something and must be justified by reduced expected loss.

Multi-attribute scoring

A method that weights objectives, scores each alternative on every objective, and sums the weighted scores to rank options. Weights must reflect trade-off importance.

Swing weighting

A weighting method that compares the ranges of objectives from worst to best level, rather than rating abstract importance, to set trade-off-consistent weights.

Preferential independence

The assumption that the trade-off between any two objectives does not depend on the levels of other objectives. It justifies the additive value model.

Groupthink

A deterioration of group judgment marked by illusory unanimity, self-censorship, and pressure on dissenters. Assigned devil's advocates and anonymous input reduce it.

Common-knowledge bias

The tendency of groups to discuss shared information more than unique information held by individual members, which reduces the value of diverse membership.

Delphi method

An iterative, anonymous expert-estimation process with controlled feedback between rounds. It reduces dominance and anchoring by high-status participants.

Pre-mortem

A technique that imagines a decision has already failed and asks participants to generate plausible causes, surfacing risks that optimism and consensus suppress.