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Sunk cost fallacy

The sunk cost fallacy is a cognitive bias where people continue investing in failing endeavors based on past investments rather than future potential, leading to irrational decision-making and resource misallocation.

Creative destruction

Creative destruction is the economic process by which innovation and competition continuously replace old industries and business models with new, more efficient ones, driving long-term economic growth despite causing short-term disruption.

Externalities

Externalities are economic side effects that occur when market transactions impose uncompensated costs or benefits on third parties, leading to market failures that can be addressed through various policy interventions including taxes, subsidies, regulations, and market-based mechanisms.

Coase theorem

The Coase theorem demonstrates that under ideal conditions with zero transaction costs and well-defined property rights, private parties can negotiate efficient solutions to externality problems without government intervention, regardless of the initial allocation of rights.

Endowment effect

The endowment effect is a cognitive bias where people value objects more highly simply because they own them, leading to systematic differences between willingness to pay and willingness to accept that challenges traditional economic assumptions about rational decision-making.

Anchoring

Anchoring is a pervasive cognitive bias where initial information disproportionately influences subsequent judgments and decisions, affecting everything from negotiations to medical diagnoses despite people's awareness of the phenomenon.

Moral hazard

Moral hazard is an economic phenomenon where parties engage in risky behavior because they do not bear the full consequences of their actions, leading to market inefficiencies that require careful management through pricing, regulation, and contract design.

Status quo bias

Status quo bias is a cognitive bias that leads people to prefer maintaining current conditions over potentially beneficial changes, operating through psychological mechanisms like loss aversion and uncertainty avoidance, with significant implications for individual decisions and societal outcomes.

Selectorate theory

Selectorate theory explains political behavior by analyzing how leaders maintain power through strategic distribution of benefits to winning coalitions, with larger coalitions promoting public goods and smaller coalitions encouraging private benefits and corruption.

Credible commitment problem

The credible commitment problem describes the challenge faced by actors who cannot convincingly promise to honor future commitments due to changing incentives over time, leading to suboptimal outcomes that can be addressed through institutional constraints, reputation mechanisms, and enforcement systems.

Median voter theorem

The median voter theorem predicts that under specific conditions of single-peaked preferences and majority rule, the policy position preferred by the median voter will prevail in democratic decision-making, leading to electoral convergence and centrist policy outcomes.

State capacity

State capacity encompasses a government's ability to effectively implement policies, deliver services, and exercise legitimate authority within its territory, serving as a crucial determinant of political stability, economic development, and social welfare outcomes.