Question 1

Which of the following Is NOT an example of System 1 thinking:

Accepted Answer

System 1 thinking involves quick, automatic, and intuitive responses. Parking in a narrow space requires careful attention and deliberate control, which is characteristic of System 2 thinking, not System 1.

Question 2

Which of the following is NOT an example of System 2 thinking:

Accepted Answer

System 2 thinking involves deliberate, effortful, and analytical reasoning. Detecting that one object is more distant than another is an example of System 1 thinking, which is automatic, fast, and often unconscious, such as perceiving objects in the environment or the basic tasks of visual recognition. Choices B, C, and D involve more conscious, effortful, and analytical processes, fitting the description of System 2 thinking.

Question 3

The current interest rate is 5%. Tiara's implicit discount rate is the same as the market interest rate and her beta is 1 (one). Tiara is indifferent between $1000 in one year and (approx.):

Accepted Answer

Since Tiara's implicit discount rate is the same as the market interest rate (5%), the present value of $1000 in one year is $1000 / (1 + 0.05) = $952.38, which is approximately $952 today.

Question 4

Given a choice of $1000 today and $1100 in one year, Izzy chose to take the $1000 today, while Olivia chose to take $1100 in one year from today. This implies that Izzy's implicit discount rate is ____, while for Olivia the implicit discount rate is _______:

Accepted Answer

Izzy's choice implies a preference for immediate gratification, suggesting a discount rate of more than 10% to prefer $1000 now over $1100 in a year. Olivia's choice indicates a willingness to wait, suggesting her discount rate is 10% or less, as she sees the future $1100 as equal or more valuable than $1000 now.

Question 5

Todd takes the market interest rate of 10% as given. Todd's beta is 0.8. This implies that Todd's beta*delta is approx. _____ and that Todd will be indifferent between $1000 in one year and approx. _____ today.

Accepted Answer

Todd's beta*delta is approx. 0.727, which implies that Todd will be indifferent between $1000 in one year and approx. $727 today.

Question 6

Patricia's implicit discount rate is the same as the market interest rate of 10%. This interest rate is not going to change in the foreseeable future. Patricia is looking to invest $1000 and wants to get the best possible return on this money. She is given the opportunity to buy one of two bonds: Bond A and Bond B. Both bonds can be purchased at a face value of $1000. Bond A will pay $1065 in one years' time. Bond B will pay $1120 in one years' time. Which of the following statements would be correct?

Accepted Answer

Bond B offers a higher return ($1120) compared to Bond A ($1065) and a term deposit at 10% interest rate ($1100). Since Patricia's implicit discount rate matches the market rate, and she aims for the best return, Bond B is the optimal choice.

Question 7

Consider three students Ben, Jeff and Lennart. Ben is indifferent between $1000 today for $1100 in one year. Jeff is indifferent between $1000 today for $1200 in one year. Lennart is indifferent between $1000 today and $1250 in one year. Which of the following statements is correct?

Accepted Answer

The answer of Consider three students Ben, Jeff and Lennart....

Question 8

Consider three students Ben, Jeff and Lennart. Ben is indifferent between $1000 today for $1100 in one year. Jeff is indifferent between $1000 today for $1200 in one year. Lennart is indifferent between $1000 today and $1250 in one year. Which of the following statements is correct?

Accepted Answer

The answer of Consider three students Ben, Jeff and Lennart....

Question 9

Consider three students Ben, Jeff and Lennart. Ben is indifferent between $1000 today for $1100 in one year. Jeff is indifferent between $1000 today for $1200 in one year. Lennart is indifferent between $1000 today and $1250 in one year. Which of the following statements is correct?

Accepted Answer

Ben's implicit discount factor (beta*delta) is approx. 0.91.

Question 10

System 1 thinking is _____, while System 2 is _________. A good analogy is to think of System 1 as _____ and System 2 as _______.

Accepted Answer

System 1 thinking is automatic, relying on intuition and quick judgments, while System 2 is deliberative, involving conscious reasoning and effort. The analogy of an elephant and its rider effectively illustrates this, with the elephant representing the powerful, instinctual reactions of System 1 and the rider symbolizing the controlled, thoughtful guidance of System 2.

Question 11

The current market interest rate is 10%. Ignore any inflationary concerns. Rebecca says that her discount factor (delta) is determined by this market interest rate. However, she also states that she is willing to accept $1000 today or $1200 a year from today. This implies that Rebecca is asking for an effective interest rate of _____; her delta is approximately ______ and therefore her beta is approximately __________.

Accepted Answer

The effective interest rate is 20% because the present value of $1200 in one year at a 10% interest rate is $1000. The discount factor is 0.909 because it is the present value of $1 in one year at a 10% interest rate. The beta is 0.967 because it is the ratio of the discount factor to the effective interest rate.

Question 12

Nick takes the market interest rate of 10% as given. Nick's beta is 0.9. This implies that Nick's beta*delta is approx. _____ and that Nick will be indifferent between $1000 in one year and approx. _____ today.

Accepted Answer

Nick's beta*delta is approx. 0.818, which implies that Nick will be indifferent between $1000 in one year and approx. $818 today.

Question 13

Izzy discounts future payoffs using an implicit discount rate of 5%. Her beta is equal to 0.8. This implies that Izzy's discount factor (beta*delta) is approximately:

Accepted Answer

The discount factor is calculated by multiplying the beta (0.8) by the discount rate delta, which is calculated as 1/(1+0.05) = 0.952. Therefore, 0.8 * 0.952 = 0.7616, which is approximately 0.762.

Question 14

One reason for making inconsistent choices over time is that we tend to discount payoffs that occur in the future differently. Consider four students: Daniel, Liam, Jessie and Karishma. Each is asked what amount of money in one year's time it will take for him/her to forego $1000 today. For Daniel, this amount is $1100, for Liam and Jessie it is $1200 and for Karishma it is $1050. Which of the following statements is true?

Accepted Answer

Karishma is the least present biased among the four because she requires the smallest increase in future payment ($50) to forego $1000 today, indicating a lower rate of discounting future payoffs compared to the others.

Question 15

One reason for making inconsistent choices over time is that we tend to discount payoffs that occur in the future differently. Consider four students: Daniel, Liam, Jessie and Karishma. Each is asked what amount of money in one year's time it will take for him/her to forego $1000 today. For Daniel, this amount is $1100, for Liam and Jessie it is $1200 and for Karishma it is $1050. Which of the following statements is true?

Accepted Answer

CPresent bias refers to the tendency to give stronger weight to payoffs that are closer to the present time when considering trade-offs between two future moments. In this scenario, Liam and Jessie, who require $1200 in a year to forego $1000 today, are showing the highest present bias because they demand the highest future payment to give up an immediate reward. This indicates they heavily discount future payoffs compared to the present. On the other hand, Karishma, who only requires $1050 in a year to forego $1000 today, shows a lower level of present bias than Daniel, Liam, and Jessie, but still exhibits present bias by demanding more in the future than the present value. This suggests that while Karishma is less present biased than Liam and Jessie, she still values the present more than the future, just to a lesser extent than Daniel, making her the least present biased among the group.

Question 16

One reason for making inconsistent choices over time is that we tend to discount payoffs that occur in the future differently. Consider four students: Daniel, Liam, Jessie and Karishma. Each is asked what amount of money in one year's time it will take for him/her to forego $1000 today. For Daniel, this amount is $1100, for Liam and Jessie it is $1200 and for Karishma it is $1050. Which of the following rankings in terms of present bias true?

Accepted Answer

The answer of One reason for making inconsistent choices over...

Question 17

Which of the following is NOT an example of the Sunk Cost Fallacy?

Accepted Answer

The Sunk Cost Fallacy occurs when individuals continue a behavior or endeavor as a result of previously invested resources (time, money, effort), even if they no longer want to or if continuing is not the best course of action. Choice D is not an example of the Sunk Cost Fallacy because Claire decides to stop reading the book despite having invested in it, indicating she is not influenced by the fallacy.

Question 18

Changing the default rule from opt-in to opt-out can be an effective way of changing behaviour such as increased savings or increased organ donation. This is an example of which phenomenon?

Accepted Answer

Framing refers to how choices are presented or "framed" to people, which can significantly influence their decisions. Changing from an opt-in to an opt-out system changes the default choice, which is a classic example of how framing can alter behavior, such as increasing savings rates or organ donation rates, by making the preferred choice the path of least resistance.

Question 19

Auckland City Council is trying to decide how to cut down on speeding in areas that are particularly accident prone. Jessica suggests to the Council that a cheaper way of achieving this goal (as opposed to having police officers wait around with a speed radar) is to put up a large billboard with a pair of eyes and the slogan: Drive Safely; Stay within the speed limit. Here, Jessica is appealing to which psychological phenomenon?

Accepted Answer

Priming is the psychological phenomenon where exposure to a stimulus influences a response to a later stimulus. In this case, the billboard with eyes and a safety message is intended to subconsciously encourage drivers to adhere to speed limits, leveraging the feeling of being watched to influence behavior.

Question 20

Most people, if asked, tend to rate the probability of death from war and violence world-wide as being higher than that from respiratory illnesses. This is factually incorrect. The reason that people make this mistake can be attributed to:

Accepted Answer

The availability bias explains this mistake because people tend to overestimate the frequency or likelihood of events based on how easily examples come to mind. War and violence are often more prominently reported in the media than respiratory illnesses, making them more memorable and leading people to believe they are more common causes of death.

Quiz 3: Gut Feelings and Effortful Thinking

Which of the following Is NOT an example of System 1 thinking:

Which of the following is NOT an example of System 2 thinking:

The current interest rate is 5%. Tiara's implicit discount rate is the same as the market interest rate and her beta is 1 (one) . Tiara is indifferent between $1000 in one year and (approx.) :

Given a choice of $1000 today and $1100 in one year, Izzy chose to take the $1000 today, while Olivia chose to take $1100 in one year from today. This implies that Izzy's implicit discount rate is , while for Olivia the implicit discount rate is ___:

Todd takes the market interest rate of 10% as given. Todd's beta is 0.8. This implies that Todd's beta*delta is approx. _ and that Todd will be indifferent between $1000 in one year and approx. _ today.

Consider three students Ben, Jeff and Lennart. Ben is indifferent between $1000 today for $1100 in one year. Jeff is indifferent between $1000 today for $1200 in one year. Lennart is indifferent between $1000 today and $1250 in one year. Which of the following statements is correct?

Consider three students Ben, Jeff and Lennart. Ben is indifferent between $1000 today for $1100 in one year. Jeff is indifferent between $1000 today for $1200 in one year. Lennart is indifferent between $1000 today and $1250 in one year. Which of the following statements is correct?

Consider three students Ben, Jeff and Lennart. Ben is indifferent between $1000 today for $1100 in one year. Jeff is indifferent between $1000 today for $1200 in one year. Lennart is indifferent between $1000 today and $1250 in one year. Which of the following statements is correct?

System 1 thinking is _, while System 2 is ___. A good analogy is to think of System 1 as _ and System 2 as _____.

Nick takes the market interest rate of 10% as given. Nick's beta is 0.9. This implies that Nick's beta*delta is approx. _ and that Nick will be indifferent between $1000 in one year and approx. _ today.

Izzy discounts future payoffs using an implicit discount rate of 5%. Her beta is equal to 0.8. This implies that Izzy's discount factor (beta*delta) is approximately:

Which of the following is NOT an example of the Sunk Cost Fallacy?

Changing the default rule from opt-in to opt-out can be an effective way of changing behaviour such as increased savings or increased organ donation. This is an example of which phenomenon?

Most people, if asked, tend to rate the probability of death from war and violence world-wide as being higher than that from respiratory illnesses. This is factually incorrect. The reason that people make this mistake can be attributed to: