Deck 5: Risk and Consumer Decision Making

Question 1

In both the endowment effect and sunk cost effect consumer tend to overestimate opportunity costs.

Answer 1

False

Question 2

As risk perceptions increase, fear appeals become less effective.

Answer 2

False

Question 3

Price bundling is often used by firms to segregate consumer losses.

Answer 3

False

Question 4

The framing effect is in direct violation to the invariance principle.

Question 5

Rogaine (a hair replenishment product) uses the framing effect when it states that 26% of men who use the product get excellent results.

Question 6

The fact that the difference between $0 and $100 seems larger than the difference between $1000 and $1,100 is due to loss aversion.

Question 7

Research on the framing effect shows that people tend to overestimate the likelihood of very small probabilities, which makes lotteries seem more attractive than they really are.

Question 8

Expected utility theory suggests that all alternatives can be rank ordered from worst to best and that alternatives with the highest expected values should be preferred.

Question 9

In preference reversal, subjects prefer one gamble when they anchor on outcomes and another when they anchor on probabilities.

Question 10

Due to the sunk cost effect, people are often reluctant to walk away from buying something after they have invested lots of time and effort in searching for and evaluating the product.

Question 11

The brand positivity effect is the tendency to view a product as more valuable if one owns it (vs. does not own it).

Question 12

If a consumer likes brand A more than brand B and likes brand B more than brand C, then it follows that the consumer must like brand A more than brand C too. This is an example of the invariance principle.

Question 13

According to expected utility theory, people should think about uncertain events in terms of frequencies.

Question 14

According to the framing effect, when people think of decisions in terms of positive outcomes, they are risk averse.

Question 15

Research on loss aversion shows that people would rather lose $100 in $10 increments, over 10 occasions, than lose the $100 dollars all at once.

Question 16

In the framing effect, preferences are said to have "reference dependence."

Question 17

Choice deferral refers to a reluctance to make a decision for some reason.

Question 18

Loss aversion implies that losses have a bigger impact on people, relative to equivalent gains.

Question 19

Liz is considering buying a new refrigerator for $1,000. It has a 20% chance of requiring a repair in the next year. The expected value in terms of repair costs for this purchase is $1,200.

Question 20

For consumers, many small gains are not as pleasant as one large gain, which means marketers should aggregate consumer gains.

Question 21

Lois is considering buying a new bicycle for $200. It has a 20% chance of breaking down in the next year. What is the expected value in terms of repair cost for this purchase?

A) $240
B) $400
C) $20
D) $200
E) $40

Question 22

As part of expected utility theory, what principle states that preferences should remain the same no matter how preferences are measured and no matter how decision alternatives are described?

A) Probability principles
B) Transitive principle
C) Choice deferral principle
D) Domination principle
E) Invariance principle

Question 23

Comparative evaluation is easier, and therefore, more common than singular evaluation.

Question 24

Nick is considering buying a new bicycle. Here are his options: Bike A - costs $100. It has a 60% chance of breaking down in the next year.
Bike B - costs $200. It has a 20% chance of breaking down in the next year.
Bike C - costs $400. It has a 15% chance of breaking down in the next year.
Which bike should Nick purchase based on expected utility theory of repair costs?

A) Bike A
B) Bike B
C) Bike C
D) Either bike A or C
E) We can't possibly answer the question with the information provided.

Question 25

According to expected utility theory, people should think about uncertain events in terms of:

A) the get-got gap
B) frequencies
C) gambles
D) selective thinking
E) the sunk cost effect

Question 26

Research on the framing effect shows that decision makers are risk averse when they focus on _____ and risk seeking when they focus on _____.

A) gains; gains
B) gains; losses
C) losses; gains
D) losses; losses
E) None of the above is correct.

Question 27

Selective thinking influences the degree to which consumers rely on the price-quality heuristic.

Question 28

Research shows that when consumers expect to have to fill out a customer satisfaction survey, they focus mainly on positives to make themselves look good.

Question 29

In singular evaluation, consumers evaluate products one-at-a-time.

Question 30

Research shows that American consumers are typically more overconfident in their decision making than Asian consumers.

Question 31

Selective thinking is more likely to occur in singular (vs. comparative) evaluation.

Question 32

_____ suggest(s) all alternatives can be rank-ordered from worst to best and that alternatives with highest expected values should be preferred.

A) Framing effects
B) The law of large numbers
C) The endowment effect
D) Expected utility theory
E) Bounded rationality theory

Question 33

Selectively overestimating the magnitude of the relationship between price and quality can be attenuated when consumers are motivated to consider exceptions to the relationship.

Question 34

Decision making under uncertainty where different outcomes are possible with different probabilities form the basis of:

A) consumer behavior
B) risky decision making
C) the get-got gap
D) selective thinking
E) the sunk cost effect

Question 35

When you ask a consumer to reject some alternative, he/she will probably focus selectively on negative attributes due to selective thinking.

Question 36

Which of the following statements about the framing effect is false?

A) The framing effect violates the invariance principle.
B) In the framing effect, preferences are said to have "reference dependence."
C) When people think of decisions in terms positive outcomes they tend to be risk seeking.
D) The framing effect can be seen across a wide variety of decision contexts.
E) The framing effect can cause preference reversals.

Question 37

Questions about money lead consumers to focus on money and questions about probabilities lead consumers to focus on probabilities. This is the basis of the dominance principle.

Question 38

If a consumer likes pizza more than lasagna and likes lasagna more than spaghetti, then it follows that the consumer must like pizza more than spaghetti too. This example is an example of what concept?

A) Invariance principle
B) Transitive principle
C) Choice deferral principle
D) Domination principle
E) None of the above is correct.

Question 39

In both singular evaluation and comparative evaluation, attributes that are familiar and easy to evaluate (versus unfamiliar and difficult to evaluate) have a greater impact on preference.

Question 40

Selective thinking could also be called one-sided thinking.

Question 41

Excessive concern about possible future feelings of regret can lead consumers to commit:

A) selective processing
B) loss aversion
C) the brand positivity effect
D) choice deferral
E) the endowment effect

Question 42

Consumers are more likely to buy ground beef described as 75% lean as opposed to 25% fat. This is an example of which phenomenon?

A) Attraction effect
B) Compromise effect
C) Preference reversal
D) Framing effect
E) Endowment effect

Question 43

In the endowment effect and the sunk cost effect, consumers underestimate:

A) motivation
B) expected utility
C) opportunity costs
D) selective processing
E) the diminishing sensitivity effect

Question 44

Consumers often overestimate the strength the relationship between price and quality, leading to an over-reliance on the price-quality heuristic. This is due to what phenomenon:

A) endowment effect
B) dominance effect
C) selecting thinking
D) framing effect
E) None of the above is correct.

Question 45

Terri decides to take golf lessons and pays $300 for 10 lessons. After the 4th lesson, Terri has decided she hates golf. She continues to play (unhappily) saying, "I don't want to waste the $300!" Terri is experiencing the:

A) sunk cost effect
B) endowment effect
C) invariance effect
D) brand positivity effect
E) diminishing sensitivity effect

Question 46

Paul went to the store to purchase a new refrigerator but quickly got so overwhelmed by all the features of the various choices that he ended of going home empty-handed. This is an example of:

A) selective processing
B) framing effect
C) the brand positivity effect
D) choice deferral
E) the endowment effect

Question 47

Which of the following factors does not potentially cause preference reversal:

A) singular vs. comparative evaluation
B) the compatibility principle
C) the framing effect
D) the sunk cost effect
E) All of the above potentially cause preference reversals.

Question 48

Which of the following statements about the concept of loss aversion, as it relates to the framing effect, is true?

A) Loss aversion implies that losses have a bigger impact on people, relative to equivalent gains.
B) People tend to overestimate the likelihood of very small probabilities.
C) Loss aversion can violate the dominance principle.
D) Loss aversion implies that marketers should aggregate loses for customers.
E) All of the above statements are true.

Question 49

"Losses loom larger than gains." What concept explains this statement?

A) Diminishing sensitivity
B) Transitivity
C) Loss aversion
D) Preference reversal
E) Risk aversion

Question 50

The idea that as preferences change when reference points related to those preferences change is known as what concept?

A) Reference dependence
B) Preference reversal
C) The framing effect
D) The base rate
E) Invariance principle

Question 51

The _____ is the tendency to view a product as more valuable if one owns it.

A) sunk cost effect
B) transitivity effect
C) compatibility principle
D) brand positivity effect
E) None of the above is correct.

Question 52

Spending $100 on groceries seems like a lot of money to a poor person and like little money to a wealthy person. This statement represents what concept?

A) Reference dependence
B) Preference reversal
C) The sunk cost effect
D) The law of large numbers
E) Invariance principle

Question 53

In order to keep customers happy, cruise lines typically include the price of the cruise, the room, the meals, the beverages, and the poolside snacks into the overall price of the cruise. This is an example of:

A) risk aversion
B) transitivity
C) price bundling
D) expected utility theory
E) the sunk cost effect

Question 54

When a consumer evaluates products two or more at a time, we call this:

A) singular evaluation
B) choice deferral
C) the compatibility principle
D) selecting thinking
E) None of the above is correct.

Question 55

Questions about money lead consumers to focus on money. Questions about probabilities lead consumers to focus on probabilities. This is the basis of what concept?

A) The compatibility principle
B) Choice deferral
C) The endowment effect
D) Comparative evaluation
E) The sunk cost effect

Question 56

Which of the following is not a concept that helps explain the framing effect?

A) Diminishing sensitivity
B) Transitivity
C) Loss aversion
D) Reference dependence
E) Risk aversion

Question 57

The _____ is the tendency to not give up a product or service because a significant amount of time, money, or effort has already been invested in it.

A) sunk cost effect
B) endowment effect
C) compatibility principle
D) brand positivity effect
E) choice deferral effect

Question 58

George was examining a sweater at a department store. When he considered the color in terms of what his male friends might say, he decided he didn't like it. But then, his girlfriend walked up beside him and said he would look good in the sweater. Suddenly, the sweater was more appealing. George is experiencing:

A) loss aversion
B) risk invariance
C) the endowment effect
D) preference reversal
E) the sunk cost effect

Question 59

Loss aversion implies that marketers should aggregate _____ and segregate _____.

A) gains; gains
B) gains; losses
C) losses; gains
D) losses; losses
E) None of the above is correct.

Question 60

Sally buys a painting at a garage sale for $25. A houseguest sees the painting hanging in Sally's house and offers to buy the painting from her for $50. Sally does not want to sell the painting despite the fact that she would never pay this much for a similar painting.

A) sunk cost effect
B) endowment effect
C) compatibility principle
D) brand positivity effect
E) None of the above is correct.

Question 61

Define the sunk cost effect and provide an example of this effect.

Question 62

What is a preference reversal and what causes a preference reversal?

Question 63

When questions are framed negatively, people tend to respond differently than when problems are framed positively. Explain this.

Question 64

Define the brand positivity effect.

Question 65

Explain the statement, "Losses loom larger than gains."

Question 66

Why do consumers often fail to maximize expected value, leading to choices they later regret?

Question 67

Define the endowment effect and provide an example of this effect.

Question 68

When it comes to gains versus losses, what does the concept of loss aversion imply for marketers?

Question 69

Nick is considering buying a new bicycle. Here are his options:
Bike A - costs $100. It has a 60% chance of breaking down in the next year.
Bike B - costs $200. It has a 20% chance of breaking down in the next year.
Bike C - costs $400. It has a 15% chance of breaking down in the next year.
Which bike should Nick purchase based on expected utility theory of repair costs?