Question 1

Whenever Josh goes to his favorite restaurant, he wants to buy tiramisu, his favorite dessert. Despite the fact that he would enjoy the flavor of the tiramisu the same amount every time, Josh only buys it when others are having dessert and never buys it if he would be the only one having dessert. Behavioral economists would say that Josh's decision is affected by

Accepted Answer

Josh's decision is influenced by framing effects because his choice to buy tiramisu is affected by how the situation is presented or "framed" (i.e., whether others are having dessert or not), rather than just the inherent value or enjoyment of the dessert itself.

Question 2

Behavioral economics recognizes that people use System 1 to make decisions more often than they use System 2. Which of the following is an implication of that decision-making process?

Accepted Answer

System 1 decision-making is fast, automatic, and emotional, often leading to decisions that deviate from the rational, calculated choices assumed by neoclassical economics. This implies that many decisions are not made based on a thorough analysis of costs and benefits, challenging the neoclassical assumption of rational behavior.

Question 3

Which of the following is the best example of a System 2 decision and action?

Accepted Answer

System 2 thinking involves deliberate, conscious thought processes, often requiring effort and analysis. Chuck's decision to quit his job after a month of contemplation and considering other offers is a calculated, thoughtful action, reflecting System 2 decision-making.

Question 4

Because heuristics appear to be hardwired into the brain, the consequences include the following, except that

Accepted Answer

Heuristics are mental shortcuts that simplify decision making, but they don't guarantee rational behavior. Instead, they can lead to biases and errors in judgment, making option C incorrect as it suggests heuristics lead to consistent rational behavior, which is not their characteristic outcome.

Question 5

Specialty shops can charge and get customers to pay higher prices for identical goods than they would pay in "big box" stores. Assuming that these differences are driven by store appearance rather than differences in services provided, which of the following best explains this phenomenon?

Accepted Answer

Framing effects explain this phenomenon because the way a product is presented (e.g., in a specialty shop versus a big box store) can influence consumers' perceptions and willingness to pay. The store's appearance can frame the product in a more exclusive or high-quality light, leading customers to value it more and be willing to pay higher prices.

Question 6

John's friend Rosika won a major lottery jackpot. Seeing this, John goes out and buys a bunch of lottery tickets despite struggling financially and even though he knows that millions don't win and that the odds of winning are infinitesimal. John's decision to buy the lottery tickets under these circumstances would best be explained by the

Accepted Answer

John's decision is best explained by the availability heuristic, which is a mental shortcut that relies on immediate examples that come to a person's mind when evaluating a specific topic, concept, method, or decision. In this case, John is influenced by the recent, vivid example of his friend Rosika winning the lottery, making him overestimate his own chances of winning despite the very low probability.

Question 7

"Heuristics" used by the human brain are one of the reasons why

Accepted Answer

Heuristics are mental shortcuts that simplify decision making but can lead to biases and errors in judgment, making human perception susceptible to context and prone to error.

Question 8

Which of the following does not illustrate the use of heuristics?

Accepted Answer

Heuristics refer to simple, efficient rules, either hardwired by evolutionary processes or learned, used to make decisions or solve problems quickly and with minimal effort. B) does not illustrate the use of heuristics because it describes a process that involves precise calculations and predictions based on scientific laws, rather than a simple, rule-of-thumb strategy.

Question 9

Which of the following cognitive biases refers to people's tendency to attribute their successes to personal ability and effort, and failures to forces outside their control?

Accepted Answer

The self-serving bias is a cognitive bias that leads individuals to attribute their successes to internal or personal factors while attributing failures to external or situational factors. This bias helps to protect self-esteem by allowing individuals to take credit for good outcomes while deflecting blame for bad outcomes.

Question 10

Dorothy likes to invest in gold as part of her overall financial investment portfolio, as her gut tells her it will increase dramatically in value. Her favorite and generally only source of investment advice is Wizard's Gold Hour on the OZ cable channel. As a result of this advice, Dorothy's portfolio mix is suboptimal, as it is too heavily weighted in gold. Behavioral economists would say that Dorothy suffers from

Accepted Answer

Dorothy's preference for advice that confirms her pre-existing belief in the value of gold investments, despite potentially better advice available, is an example of confirmation bias. She seeks out information that supports her views and ignores or discounts information that contradicts them.

Question 11

Fatal automobile accidents occur much more frequently than do fatal airplane crashes, yet airplane crashes receive a disproportionate amount of media coverage. As a result, some people are overly fearful of flying in planes yet have no problem riding in cars. Which of the following cognitive biases best explains this disconnect between these people's fears and the statistical realities?

Accepted Answer

The availability heuristic explains this disconnect because it is a cognitive bias that causes people to overestimate the likelihood of events based on their availability in memory, which is influenced by how recent and how emotionally charged those events are. Airplane crashes, being dramatic and widely reported, are more memorable than the more common but less reported car accidents, leading to an inflated perception of their frequency.

Question 12

When people convince themselves that they "knew all along" what was going to happen, when in fact their predictions were incorrect, they suffer from

Accepted Answer

This phenomenon is known as hindsight bias, where individuals believe they could predict the outcome of an event after it has already happened, even if they had no basis for predicting it beforehand.

Question 13

What are the two categories of cognitive biases identified by behavioral economists?

Accepted Answer

Behavioral economists categorize cognitive biases into two main types: those stemming from the human brain's unevolved capacity to solve modern problems, and those arising from faulty heuristics, which are mental shortcuts that can lead to errors in judgment.

Question 14

Brain scientists have found that the human brain devotes more neurons toward processing and interpreting visual information than it does to anything else. Therefore,

Accepted Answer

The human brain's significant allocation of neurons to process visual information suggests a high priority on visual perception, but it doesn't guarantee accuracy. This complexity implies that, just as our visual perception can be deceived, we might also be prone to errors in other cognitive areas.

Question 15

In anonymous surveys, on average people rate themselves as "above average" with regard to characteristics such as intelligence, perceptiveness, and driving ability. According to behavioral economics, this contradictory result would most likely be caused by the

Accepted Answer

The overconfidence effect refers to the tendency of people to overestimate their own abilities, leading them to rate themselves as "above average" in various characteristics.

Question 16

According to behavioral economics, cognitive biases

Accepted Answer

Cognitive biases are systematic errors in thinking that affect the decisions and judgments that people make. Behavioral economics studies these biases, which are not random but follow predictable patterns, influencing economic decisions in a systematic way.

Question 17

Augi carefully plans out an early morning exercise routine to lose weight and get fit. When it's time to work out, however, Augi just "doesn't feel up to it" and decides to sleep in. Behavioral economics would say that Augi

Accepted Answer

Behavioral economics would suggest that Augi used System 2 (the analytical, conscious part of the brain) to plan her workout, recognizing its long-term benefits. However, when it came time to actually do the workout, she gave in to System 1 (the automatic, instinctive part of the brain) that seeks immediate comfort, leading her to sleep in instead.

Question 18

Because gun violence is portrayed frequently on television and in movies, people mistakenly assign too high of a probability that they will fall victim to gun violence and too low of a probability of suffering from more likely but less publicized events. This phenomenon illustrates

Accepted Answer

The availability heuristic is a mental shortcut that relies on immediate examples that come to a person's mind when evaluating a specific topic, concept, method, or decision. The frequent portrayal of gun violence in media makes such events more memorable and thus leads people to overestimate their likelihood, illustrating the effect of the availability heuristic.

Question 19

"Heuristics" used by the human brain refer to the

Accepted Answer

Heuristics are mental shortcuts that the brain uses to simplify decision-making processes, allowing for quicker judgments and solutions by reducing the cognitive load.

Question 20

Dan was certain that his upcoming economics test would be so easy that he could wait to study until the night before and still do well on the exam. When he cracked open his book and notes the night before the exam, he realized he should've started studying earlier. According to behavioral economics, Dan's error was caused primarily by

Accepted Answer

A planning fallacy is a cognitive bias that causes people to underestimate the amount of time it will take to complete a task. In this case, Dan underestimated the amount of time it would take him to study for the economics test, and as a result, he did not start studying until the night before the exam.

Quiz 8: Behavioral Economics