Deck 16: Social Psychology and Personal Finance

Question 1

Melinda and Julie want to get off to a great start with their new business selling baby toys.Melinda proposes that they offer at least 35 different types of stuffed animals to give their consumers a wide range of choices; however, Julie counters that they should start with only five different stuffed animals.If their primary goal is to encourage consumers to buy stuffed animals, whose approach is correct?

A) Julie's, because too many choices leads to decision paralysis.
B) Julie's, because a core of a few items builds greater brand loyalty.
C) Melinda's, because the more choices available, the greater the likelihood of matching the unique needs of each consumer.
D) Melinda's, because the abundance of choices will lead to impulse buying.

Answer 1

Julie's, because too many choices leads to decision paralysis.

Question 2

People often make irrational decisions about their finances because of the ways that they mentally account for money that comes from different sources.

Answer 2

True

Question 3

The fact that the price of stock in Computer Literacy, Inc.increased by 33 percent in one day because it changed its name to fatbrain.com illustrates

A) the importance of branding.
B) the presence of irrationality in the stock trading.
C) the absence of any basis for fairly valuing stocks.
D) the fact that humans cannot make rational decisions about investments.

Answer 3

the presence of irrationality in the stock trading.

Question 4

Jacquie has just lost $100 on a bet with a friend.The friend offers her a double-or-nothing deal, which would result in either her winning back her $100 and having no loss or losing a total of $200.The alternative would simply be to accept her already certain loss of $100.According to the principle of diminishing marginal utility, Jacquie will be more likely to

A) bet again in the hopes of wiping out her earlier $100 loss.
B) bet again so that she can save face in front of her friend.
C) decline to bet and simply accept her $100 loss.
D) decline to bet again but make plans for how she will get back at her friend.

Question 5

Rhonda and June are both planning a trip to Las Vegas.Rhonda saved up for six months to pay for the trip, whereas June was given plane tickets and hotel lodging as a bonus from her employer.In both cases, the purchase of the trips is nonrefundable.Two days before the trip, Rhonda and June both develop bronchitis and have a strong desire to cancel the trip.Given this situation, which of the following is true?

A) Rhonda is more likely to cancel the trip, whereas June is more likely to go through with the trip because she will feel obligated to honor the gift she received.
B) Rhonda is more likely to cancel the trip, because purchasing the trip on her own gives her a greater sense of control.
C) Rhonda will be less likely to cancel the trip, because she will be reluctant to waste her money, even though she will not likely enjoy the vacation due to her sickness.
D) Rhonda will be less likely to cancel the trip, because she will have developing a tendency toward risk seeking after purchasing her tickets.

Question 6

The textbook suggests that the key to having sufficient savings later in life is to start saving early.Why is this recommended?

A) Saving money earlier in life gets you into the habit of saving, so you are likely to continue.
B) You can take advantage of compound interest to grow your savings faster.
C) You are less likely to fall prey to the sunk cost error.
D) If you gain more money early, you will be more resistant to loss aversion if something happens to the stock market.

Question 7

The finding that individuals tend to have a negative reaction to losing an amount of money-a reaction that is stronger in magnitude than the positive emotions associated with gaining the same amount of money-is referred to as

A) risk tolerance.
B) market irrationality.
C) loss aversion.
D) risk avoidance.

Question 8

David's insistence that he go see a movie for which he had already purchased nonrefundable tickets, even though he was exhausted and had no desire to see the movie, best illustrates

A) risk avoidance.
B) the sunken cost fallacy.
C) loss aversion.
D) the influence of fatigue on decision-making abilities.

Question 9

When we have too many options to choose from when we are making a purchase, we are likely to become overwhelmed and choose not to buy anything at all.

Question 10

Due to loss aversion, we are more likely to sell stocks that have gone down in value, compared with those that have gone up in value.

Question 11

As a benevolent CEO, Donald wants his employees to reap great financial benefits from working at his company.After consulting with a specialist in investor behavior, Donald makes the wise choice of

A) offering his employees a diverse but small number of options for their 401(k)s.
B) offering retirement funding in the form of poker chips that they can play at a local casino.
C) offering his employees every possible fund for them to choose from for their 401(k)s.
D) deciding on his employees' behalf which funds they should invest in for their 401(k)s.

Question 12

Because of our highly developed cognitive skills and the importance of money in our lives, people rarely make errors in their financial decisions.

Question 13

David has $10,000 worth of stocks in his trading account.He needs to cash in $1,000 worth of stock to make a purchase.He could sell shares in one stock (Jupiter, Inc.)that cost him $2,000 initially but is now only worth $1,000, or he could sell shares in another stock (Mercury Co.)that he bought for $500 but is now worth $1,000.Even though the amount of money withdrawn would be the same, which stock is he more likely to cash out?

A) Jupiter, Inc.
B) Mercury Co.
C) He is more likely to select a stock that was originally purchased at $1,000.
D) The original stock price will have no influence on his decision.

Question 14

Decision paralysis would be best illustrated by

A) Martha's inability to decide on a college because she has a low sense of control.
B) Matt's difficulty in deciding whether to break up with his girlfriend because he does not want to hurt her feelings.
C) Mike's difficulty in selecting a road bike to purchase out of the 75 different bikes for sale.
D) Linda's inability to decide whether to practice yoga or meditation, because they both have great health benefits.

Question 15

Behavioral economics is a field that applies data from psychological research to create more accurate models of economic behavior.

Question 16

Jerome has found that his investment performance has not been very good.When he studies behavioral economics to get a better understanding of his poor performance, he finds that like many other people, he was more likely to buy stocks when

A) the day was sunny rather than cloudy.
B) his favorite sports team won rather than lost.
C) he was in a good mood.
D) All of the above are correct.

Question 17

When psychologists began applying insights from psychology to develop models about economic behavior, they were developing the field of

A) financial psychology.
B) behavioral economics.
C) economic psychology.
D) social-psychological finance.

Question 18

According to what you know about mental accounting, if you were a government official who wanted to stimulate the economy by increasing spending, which of the following should you do?

A) send all adults a $500 tax rebate
B) send all adults a $500 bonus
C) send $500 only to those who paid high taxes the previous year
D) send $500 only to those who paid no taxes the previous year

Question 19

Risk aversion is

A) the general human tendency to stay away from activities that are dangerous, even if they may be fun.
B) the reluctance to choose an uncertain option that, on average, pays better than the certain payoff of a second option.
C) the reluctance to enter into any transaction in which the outcome is not known with certainty.
D) the tendency to seek out activities that are mildly dangerous but thrilling.

Question 20

Deborah went to the casino with $1,000 and has managed to win an additional $500.At this point, she has $1,500 in her possession; however, she separates this money into $1,000 that she stores in her purse, and the remaining $500, which she continues to gamble with.Deborah's behavior illustrates the phenomenon of

A) mental accounting.
B) superstitious behavior.
C) the gambler's fallacy.
D) magical thinking.