Deck 13: Behavioral Economics

Question 1

Disadvantages of experiments include

A) Decisions made in the laboratory differ from those made in the real world
B) Laboratory experiments introduce influences on decision making that are difficult to measure or control
C) Experimental subjects are typically not representative of the general population
D) All of these

Answer 1

All of these

Question 2

Anchoring occurs when

A) Someone's choices are linked to prominent but patently irrelevant information
B) Someone's choices are linked to prominent and relevant information
C) Someone's choices are made in the absence of relevant information
D) Someone's choices are based solely upon proven and relevant information

Answer 2

Someone's choices are linked to prominent but patently irrelevant information

Question 3

The default effect

A) Refers to the observation that people tend to value something more highly when they own it than when they don't
B) Refers to the observation that people tend to value something more highly when they don't own it than when they do
C) Refers to the fact that when confronted with many alternatives, people sometimes avoid making a choice and end up with the option that is assigned as a default
D) Refers to the observation that people do not have a strong attachment to the status quo

Answer 3

Refers to the fact that when confronted with many alternatives, people sometimes avoid making a choice and end up with the option that is assigned as a default

Question 4

Evidence that people do not always make choices that reflect sensible preferences include

A) Choice reversals
B) Conformance to the principle of revealed preference
C) Conformance to the Ranking Principle
D) All of these

Question 5

Disadvantages of experiments include

A) Decisions made in the laboratory replicate those made in the real world
B) Laboratory experiments introduce influences on decision making that are difficult to measure or control
C) The number of subjects is typically so large, that it is difficult to apply the results to economic behavior in the population
D) Costly

Question 6

Suppose you conduct a study in which subjects are asked the following questions: 1." Imagine that you have decided to go to a basketball game where the cost is $25 per ticket.As you enter the arena,you discover that you have lost your $25.Would you still pay $25 for a ticket?" 2."Imagine that you have decided to go to a basketball game and you pay $25 for the ticket.As you are walking into the arena you realize that you have lost your ticket.Would you pay another $25 for another ticket?" You find that 90% of your subjects answered "Yes" to the second question,compared to the 50% that answered "Yes" to the first question.This is an example of

A) The default effect
B) The endowment effect
C) Narrow framing
D) Dynamic inconsistency

Question 7

Motivations for behavioral economics include

A) People sometimes make choices that are consistent with standard economic theory
B) All choices made by individuals are consistent with standard economic theory
C) Standard economic theory can lead to unreasonable conclusions about consumer welfare
D) People always make choices that are inconsistent with standard economic theory

Question 8

Behavioral economists

A) Rely primarily on data drawn from the real world
B) Rely only on experimental data
C) Typically assume that each individual has well-defined objectives, that there is a connection between an individual's objectives and actions and that the actions chosen affect an individual's well being
D) Rely only on data drawn from the real world

Question 9

Advantages of experiments include

A) It is easier to determine whether people's choices are consistent with standard economic theory
B) It is often harder to establish causality
C) Cost saving
D) None of these

Question 10

Identified departures from perfect rationality include

A) Incoherent choices
B) Bias towards the status quo
C) Anchoring
D) All of these

Question 11

A person is dynamically consistent if

A) Lapses in self-control never occur
B) His preferences over the alternatives available at some future date do not change as the date approaches or once it arrives
C) He always wants to follow through on his plans and intentions
D) All of these

Question 12

Narrow framing

A) Refers to the observation that people tend to value something more highly when they own it than when they don't
B) Refers to the observation that people tend to value something more highly when they don't own it than when they do
C) Is the psychological tendency to group related items into categories and in making a choice, to consider other items in the same category while ignoring items in different categories
D) Refers to the observation that people must make choices in the presence of uncertainty

Question 13

The endowment effect

A) Refers to the observation that people tend to value something more highly when they own it than when they don't
B) Refers to the observation that people tend to value something more highly when they don't own it than when they do
C) Refers to the fact that when confronted with many alternatives, people sometimes avoid making a choice and end up with the option that is assigned as a default
D) Refers to the observation that people do not have a strong attachment to the status quo

Question 14

Behavioral economists view the standard economic theory of decisions involving time as being too restrictive because people

A) Have lapses in self-control
B) Make systematic errors in forecasting the future
C) Are reluctant to abandon projects after incurring substantial sunk costs, despite low probabilities of success
D) All of these

Question 15

A person is dynamically consistent if

A) His preferences over the alternatives available at some future date change as the date approaches or once it arrives
B) His preferences over the alternatives available at some future date do not change as the date approaches or once it arrives
C) He always does not want to follow through on his plans and intentions
D) He always chooses the same product

Question 16

Behavioral economists view the standard economic theory of decisions involving time as being too restrictive because people have

A) Lapses in self-control
B) Perfect foresight
C) A tendency to ignore sunk costs
D) Budget constraint

Question 17

Behavioral economists

A) Rely primarily on data drawn from the real world
B) Rely primarily on experimental data
C) Avoid mathematical models of behavior, as they do not adequately describe real world actions
D) Rely only on experimental data

Question 18

The endowment effect is reflected by indifference curves that are

A) Concave to the origin
B) Convex to the origin
C) Straight lines
D) Kinked

Question 19

A person is dynamically consistent if

A) His preferences over the alternatives available at some future date change as the date approaches or once it arrives
B) His preferences over the alternatives available at some future date do not change as the date approaches or once it arrives
C) He does not always want to follow through on his plans and intentions
D) A and C

Question 20

Advantages of experiments include

A) It is easier to determine whether people's choices are consistent with standard economic theory
B) It is often easier to establish causality
C) Researchers can double check their assumptions and conclusions by testing and debriefing subjects
D) All of these

Question 21

Prospect theory

A) Is an alternative to expected utility theory that may resolve a number of puzzles related to risky decisions
B) Was proposed by Daniel Kahneman only
C) Was proposed by John Nash
D) Was proposed by Ryerson

Question 22

Lily wants to invest in the stock market.She notices that the share price for Widgets Inc.has been falling for weeks.She chooses to invest in Widgets Inc.because she assumes it is due for a rebound.Lily suffers from

A) The hot-hand fallacy
B) The gambler's fallacy
C) Irrational exuberance
D) The sunk cost fallacy

Question 23

The principle of diminishing sensitivity holds that

A) The marginal impact of enlarging a change from the status quo declines with the size of the change
B) The marginal impact of enlarging a change from the status quo increases with the size of the change
C) The total impact of enlarging a change from the status quo declines with the size of the change
D) The total impact of enlarging a change from the status quo increases with the size of the change

Question 24

A dieter who prefers to eat small portions at his next meal,but chooses a large portion at mealtime when it arrives is

A) Dynamically consistent
B) Perfectly inconsistent
C) Exhibiting a present bias
D) Result of randomization

Question 25

The hot-hand fallacy

A) Is the belief that once an event has occurred several times in a row, it is less likely to repeat
B) Is the belief that once an event has occurred, it is less likely to repeat
C) Is the belief that once an event has occurred several times in a row, it is more likely to repeat
D) Is the belief that if an event has never occurred, it is more likely to occur

Question 26

Pre commitment is

A) A solution for dynamic inconsistency
B) A choice that removes future options
C) A way to avoid "bad" choices by restricting future options
D) All of these

Question 27

Loss aversion occurs when

A) The consumer's valuation of an outcome is less sensitive, per dollar, to small losses than to small gains
B) The consumer's valuation of an outcome is more sensitive, per dollar, to small losses than to small gains
C) The consumer's valuation of an outcome is less sensitive, per dollar, to large losses than to small gains
D) Suppliers are inelastic to price changes

Question 28

Projection bias

A) Is the tendency to evaluate present consequences based upon tastes and needs of the future
B) Is the tendency to evaluate future consequences based on tastes and needs at the moment of the decision making
C) Is the tendency to project future states of mind to the present
D) Can lead people to overestimate their adaptability

Question 29

A person is dynamically inconsistent if

A) Lapses in self-control occur
B) He does not always follow through on his plans and intentions
C) He changes his ranking of alternatives available at some future date as the date approaches or once it arrives
D) All of these

Question 30

A dieter who prefers to eat small portions at his next meal,but chooses a large portion at mealtime when it arrives is

A) Dynamically consistent
B) Dynamically inconsistent
C) Exhibiting self-control
D) Exhibiting a past bias

Question 31

A person who is more willing to throw away a shirt that cost $20 than one that cost $200 is

A) Dynamically inconsistent
B) Dynamically consistent
C) Suffers from the sunk cost fallacy
D) Exhibiting a present bias

Question 32

Gabby flips a fair coin and it shows heads.When trying to guess what the coin will show on the next flip,Gabby guesses heads because she thinks it is more likely to occur than tails since the coin showed heads on the last flip.Gabby suffers from the

A) Gambler's fallacy
B) Gambler's myth
C) Hot-hand fallacy
D) Cold-hand fallacy

Question 33

Suppose Hillary was offered the following choices: 1.Win $10 for sure or 2.Win $20,000 with odds of 1 in 2,000; otherwise win nothing.If Hillary is risk loving she will choose

A) Option 1
B) Option 2
C) She is indifferent between the two
D) Both with equal probability

Question 34

Prospect theory was proposed by

A) John Nash
B) Milton Friedman and George Stigler
C) Amos Tversky and Daniel Kahneman
D) Gary Becker

Question 35

A person is dynamically inconsistent if

A) Lapses in self-control never occur
B) His preferences over the alternatives available at some future date do not change as the date approaches or once it arrives
C) He does not always follow through on his plans and intentions
D) All of these

Question 36

Gabby flips a fair coin and it comes up heads.Gabby suffers from the hot-hand fallacy if

A) She thinks the coin will come up heads on the next flip because it came up heads on the previous flip
B) She thinks the coin will come up tails on the next flip because it came up heads on the previous flip
C) She thinks the coin is less likely to come up heads because it came up heads on the previous flip
D) She thinks the coin is equally likely to come up heads or tails on the next flip

Question 37

Suppose Hillary was offered the following choices: 1.Win $10 for sure or 2.Win $20,000 with odds of 1 in 2,000; otherwise win nothing.If Hillary is risk averse she will choose

A) Option 1
B) Option 2
C) She is indifferent between the two
D) Both with equal probability

Question 38

Projection bias

A) Is the tendency to evaluate future consequences based on tastes and needs at the moment of the decision making
B) Is the tendency to project current states of mind into the future
C) Can lead people to underestimate their adaptability
D) All of these

Question 39

The gambler's fallacy

A) Is the belief that if an event has ever occurred, it is less likely to repeat
B) Is the belief that once an event has occurred, it is less likely to repeat
C) Is the belief that once an event has occurred several times in a row, it is more likely to repeat
D) Is the belief that if an event has never occurred, it is more likely to occur

Question 40

Gabby flips a fair coin and it comes up heads.Gabby suffers from the gambler's fallacy if

A) She thinks the coin will come up heads on the next flip because it came up heads on the previous flip
B) She is more willing to bet on the outcome of the next flip
C) She thinks the coin is less likely to come up heads because it came up heads on the previous flip
D) She thinks the coin is equally likely to come up heads or tails on the next flip

Question 41

In a voluntary contribution game

A) Each member of a group makes a contribution to a common pool, but each contribution only benefits the contributor
B) Each member of a group makes a contribution to a common pool and each contribution benefits everyone
C) A conflict is created between individual interests only
D) A conflict is created between corporative interests only

Question 42

Game theory tells us that in the ultimatum game

A) The threat to reject is credible
B) The threat to reject in not credible
C) People are expected to give more under a threat of rejection
D) A and C

Question 43

Choices made in the ultimatum game suggest

A) That in social situations, emotions such as anger and indignation influence economic decisions
B) That in social situations, emotions such as anger and indignation do not influence economic situations
C) That individuals are influenced by individual motives
D) Social inefficiency

Question 44

Neuro economics

A) Studies the human neural system, including brain processes, with the object of testing old economic theories
B) Studies the human neural system, including the brain processes, with the object of discovering new principles of economic decision making
C) Is a well established field in economics
D) Is established by Daniel Kahneman

Question 45

The theory of rational addiction

A) Holds that the consumption of addictive substances is simply an expression of consumer preferences
B) Explains that addictive substances are distinguished only by consumer behaviors
C) Fails to explain cigarette consumption in the U.S
D) Is the most dominant theory in economics

Question 46

Social motives include

A) Altruism
B) Fairness
C) The desire to create a favorable impression
D) All of these

Question 47

In the dictator game

A) One player (the dictator) divides a fixed prize between himself and another player (the recipient) who is an active participant
B) One player (the dictator) divides a fixed prize between himself and another player (the recipient) who is an passive participant
C) One player (the dictator) must keep a fixed prize all to himself
D) One player (the dictator) must give all of a fixed prize to another player (the recipient) who is a passive participant

Question 48

In the trust game

A) Game theory tells us that trustees will be untrustworthy and trustees will forego potentially profitable investments
B) Both players divides up the principle and earnings together
C) One player (the trustee) decides both how much money to invest and how the principle and earnings are divided between himself and the other players
D) Both players decide how much to invest together

Question 49

Suppose Dean has season tickets for the University of North Carolina men's basketball games.He paid $2,000 for the season tickets.One February afternoon,Dean is very excited about going to the UNC vs.Duke game because of the traditional rivalry between the two teams.Unfortunately,his wife invited several friends over for an evening dinner party and tells Dean he needs to stay home and help her clean the house in preparation for the guests.Dean very much wants to go to the game,but knows he will have to face the wrath of his wife if he does.In his defense,Dean states "I already paid for the game! I have to go or it will be a waste of money." Explain why Dean's reasoning is incorrect.

Question 50

The faculty of Mistaken University is voting on a curricular reform.Members of the faulty have been working on the proposed curriculum for over four years.Some faculty members are going to vote for the reform because so much time and money has already been invested in it.Explain why these faculty members are mistaken in their reasoning.

Question 51

In the ultimatum game

A) One player (the proposal) offers to give the second player (the recipient) some share of a fixed prize; the recipient then decides whether to accept or reject the proposal
B) Is a single-stage game
C) One player (the proposal) gives the second player (the recipient) some share of a fixed prize; the recipient must keep the amount given
D) Was proposed by John Nash