Question 1

The "anchoring" phenomenon observed by behavioral economists refers to the fact that people's estimates of the value of things are affected by

Accepted Answer

Anchoring refers to the cognitive bias where an individual's decisions or estimates are influenced by a particular reference point or initial piece of information (the "anchor"), which may not necessarily be relevant or recent. This means that people's judgments can be swayed by an initial piece of information they are given, even if it's not directly related to the decision at hand.

Question 2

According to behavioral economics research, in which of the following cases would we expect a person to experience no net change in their utility?

Accepted Answer

The answer of According to behavioral economics research, in which...

Question 3

Credit card companies put a low "minimum required payment" on people's bills in the hope that people will send in low payments, thereby allowing the card companies to earn more interest. The companies are trying to exploit the

Accepted Answer

The anchoring effect is when an individual relies too heavily on an initial piece of information (in this case, the "minimum required payment") to make subsequent decisions. Credit card companies set a low minimum payment as an anchor to encourage consumers to pay just that amount, which in turn allows the companies to earn more interest as the remaining balance accrues interest over time.

Question 4

Behavioral economists have found that one major explanation for the intercountry differences in participation rates in organ-donation programs is

Accepted Answer

Status quo bias explains the intercountry differences in participation rates in organ-donation programs because it describes the preference for the current state of affairs, and the default options in organ-donation programs significantly influence individuals' decisions to participate.

Question 5

Parker's shares of stock in ACME Corporation lost $200 in value, but his shares in XYZ, Inc. gained $500. According to behavioral economics research, how would Parker feel as a result of these changes?

Accepted Answer

The answer of Parker's shares of stock in ACME Corporation...

Question 6

Fred just purchased an expensive new refrigerator and is considering purchasing the overpriced warranty. In making his decision on the warranty, Fred ignores better ways that his money could be spent, including paying off high-interest credit card debt. According to prospect theory, the process that leads Fred to ignore the debt and buy the overpriced warranty is

Accepted Answer

Mental accounting refers to the tendency of individuals to categorize and treat money differently depending on its source, intended use, or other psychological factors. In Fred's case, he is mentally separating his money into different "accounts" (e.g., money for appliances vs. money for debt repayment) and not considering the overall utility of his money, leading him to potentially make a financially suboptimal decision by purchasing the overpriced warranty instead of paying off high-interest credit card debt.

Question 7

Huxley lost $100 in the stock market. According to behavioral economics research, how much of a gain would he have to experience to offset the feeling of loss and have no net change in utility?

Accepted Answer

According to behavioral economics, particularly the concept of loss aversion, people typically experience the pain of loss about twice as powerfully as the pleasure of a gain. Therefore, to offset a $100 loss, Huxley would need a gain of about $200. However, since the closest option provided is $250, that would be the correct choice to ensure no net change in utility.

Question 8

The tendency of people to believe that something they own is more valuable than an identical item that they do not own is known in prospect theory as the

Accepted Answer

The endowment effect is a psychological phenomenon where people ascribe more value to things merely because they own them. This is distinct from the anchoring effect, status quo bias, and confirmation bias, which involve different cognitive biases and decision-making processes.

Question 9

Behavioral economists suggest that the reason why many consumers tend to stick to one brand in things that they often buy, like food items, is people's tendency to have the

Accepted Answer

The status quo bias explains why consumers tend to stick with their current preferences or the existing state of affairs, such as consistently choosing the same brand for purchases, due to the comfort and familiarity it provides, avoiding change or the effort required to evaluate alternatives.

Question 10

Framing effects in prospect theory indicate that a given result, such as "an investment return of 10 percent,"

Accepted Answer

Framing effects suggest that the perception of outcomes, such as an investment return, can be influenced by how they are presented or the context in which they are seen. Thus, a 10 percent return could be seen as a gain or a loss depending on expectations, comparisons, or how the information is framed.

Question 11

Economist John List has shown that the so-called endowment effect tends to be lower among people who often

Accepted Answer

John List's research indicates that the endowment effect, which is the tendency for people to ascribe more value to things merely because they own them, is less pronounced among individuals who frequently buy items with the intention of reselling them. This is because such individuals are more accustomed to thinking about goods in a market context, making them more objective about the value of possessions.

Question 12

People's tendency to prefer the "default" option over other options is known in prospect theory as

Accepted Answer

Status quo bias is the concept in behavioral economics and decision theory where people tend to prefer the default option or the current state of affairs over a change. This bias explains why individuals are more likely to stick with what they know or what is already selected for them (the "default" option) rather than opting for a change, even if the alternative may be better.

Question 13

The tendency of people to overestimate the value of their possessions when, say, considering such value for insurance purposes is known in prospect theory as the

Accepted Answer

The endowment effect is a cognitive bias that leads people to value an owned object higher than its market value, which explains why individuals might overestimate the value of their possessions for insurance purposes.

Question 14

That most people would prefer to buy meat that is 80 percent lean rather than meat that is 20 percent fat is an illustration of the

Accepted Answer

This is an example of the framing effect, where the way information is presented (framed) affects decision-making or judgments. The same product is viewed differently based on whether it is presented in a positive (80 percent lean) or negative (20 percent fat) light, even though the two descriptions convey the same information.

Question 15

Which of the following questions best illustrates the "framing effects" studied by behavioral economists?

Accepted Answer

Framing effects refer to how people's decisions are influenced by the way choices are presented or framed. Choice B illustrates this by presenting a scenario where the relative value of money is emphasized over its absolute value, highlighting how people might react differently based on social comparisons rather than just the monetary amount.

Question 16

Behavioral economists suggest that brand loyalty, which can be a source of monopoly power for the producer, may be explained by consumers' tendency to have the

Accepted Answer

Brand loyalty is often a result of the status quo bias, where consumers prefer to stick with their current choice (the status quo) rather than switch to a new option, even if the new option might offer better value or quality. This tendency can give producers a form of monopoly power, as it reduces competition by making it harder for rival brands to attract customers away from their established preferences.

Question 17

That people tend to hold on to shares of stock well past the point where it makes sense to sell those shares can be explained in part by the

Accepted Answer

The endowment effect refers to the tendency for people to value something more highly simply because they own it, leading them to hold onto stocks longer than is rational.

Question 18

Some behavioral economists explain the so-called endowment effect to be a consequence of people's tendency to

Accepted Answer

The endowment effect is a phenomenon where people ascribe more value to things merely because they own them. This is often explained by loss aversion, a principle in behavioral economics suggesting that people feel the pain of losing something more intensely than the pleasure of gaining something of equivalent value.

Question 19

Prospect theory explains the status-quo bias as a combination of loss aversion and the

Accepted Answer

Prospect theory explains the status-quo bias primarily through the endowment effect, which suggests that people value things more highly once they own them, leading to a reluctance to change from the current situation due to the perceived loss of giving up the owned item.

Question 20

Which of the following statements about behavioral economics is not true?

Accepted Answer

Behavioral economics challenges the traditional economic assumption that people are always rational, deliberate, and objective in their choices. Instead, it acknowledges that cognitive biases and emotions can significantly influence decision-making.

Quiz 8: Behavioral Economics