Understand the concept. Not just the picture.

Input substitution

Changing the mix of inputs while maintaining output.

Projection bias

Overestimating how closely future preferences will resemble how you feel now.

Accrual accounting

Recording revenue when earned and expenses when incurred, rather than when cash moves.

Maximum drawdown

The largest percentage fall from a peak to a subsequent trough over an observed period.

Economic rent

Payment to a resource above the minimum needed to keep it in its current use.

Ambiguity aversion

A preference for known probabilities over unknown probabilities in otherwise comparable choices.

Income statement

A report of revenue, expenses and profit or loss over a period.

Arithmetic average return

The sum of periodic returns divided by the number of periods.

Shutdown condition

In the short run, stopping production may minimise losses when revenue cannot cover avoidable costs.

Decoy effect

An additional option can change preferences between existing options when it is dominated by one of them.

Balance sheet

A snapshot of assets, liabilities and equity at a particular date.

Geometric average return

The constant periodic return that produces the same compounded growth as the actual returns.

Opportunity cost

The value of the best alternative you give up when making a choice.

Price elasticity of demand

How strongly quantity demanded responds to a change in price, measured using percentage changes.

Comparative advantage

Producing something at a lower opportunity cost than another producer.

Marginal analysis

Comparing the extra benefit and extra cost of a small additional action.

Inflation

An increase in the general price level over time, not simply one expensive item.

Loss aversion

Losses may weigh more heavily than comparable gains relative to a reference point.

Present bias

Giving disproportionate weight to immediate outcomes compared with later ones.

Anchoring

Allowing an initial reference value to influence a later judgement, even when it is weakly relevant.

Confirmation bias

Giving more attention or weight to evidence that supports an existing belief.

Mental accounting

Treating money differently according to the labels or categories assigned to it.

Compound interest

Interest calculated on both the original amount and accumulated interest.

Emergency fund

Money set aside for unexpected necessary expenses or an interruption to income.

Cash flow

Cash coming into and going out of an activity over a period.

Working capital

Current assets minus current liabilities: a measure of short-term financial position.

Break-even point

The sales level at which total revenue equals total costs under stated assumptions.

Diversification

Spreading exposure across different investments to reduce concentration risk.

Real return

A return adjusted for changes in purchasing power.

Risk premium

Extra expected return above a chosen lower-risk benchmark for bearing additional risk.

Bond price and yield

For a fixed set of promised bond cash flows, a higher required yield implies a lower present price.

Liquidity

The ability to buy or sell an asset promptly without a substantial price concession.

Negative externality

A cost imposed on others that is not fully reflected in the decision-maker’s private costs.

Carbon tax

A price imposed on greenhouse-gas emissions or their carbon content to create an incentive to reduce them.

Emissions trading

A system in which covered emitters trade allowances under an emissions limit.

Common-pool resource

A resource that is difficult to exclude people from using, but whose use reduces what remains for others.

Public good

A good that is non-rival in use and difficult to exclude non-payers from enjoying.

Social cost

The full cost of an activity, including private costs and external costs imposed on others.

Marginal abatement cost

The additional cost of reducing one more unit of pollution.

Environmental discounting

Using a discount rate to compare benefits and costs occurring at different times.

Correlation

A statistical description of how variables move together, not proof that one causes the other.

Causation

A change in one factor produces a change in another, assessed against what would have happened otherwise.

Regression

A method for modelling how an outcome varies with one or more explanatory variables.

Selection bias

Distortion arising when the observed sample or treatment groups differ systematically in relevant ways.

Omitted variable bias

Bias in a regression coefficient when an omitted relevant factor is correlated with an included explanatory variable.

Confidence interval

An interval produced by a method with a stated long-run coverage rate under its assumptions.

Randomised experiment

A study assigning treatment by chance to make groups comparable in expectation.

External validity

The extent to which a study’s findings apply to other people, settings or times.