Question 1

What accounts for the high rate of auctions on eBay that fail to reach a sale?

Accepted Answer

the endowment effect causes sellers' reservation prices to be higher than the highest bids.

Question 2

A product's transactional utility is contingent upon:
A)The product's acquisition utility.
B)A reference price.
C)The level of risk associated with the product.
D)All of the above.

Accepted Answer

Transactional utility is based on the perceived value of a deal compared to a reference price, which is the expected or typical price for the product.

Question 3

A credit card company wants to market a new scheme for its clients,offering them 5% of their yearly spending as a cash gift at the end of the year.How should the company refer to this rebate,and why?

Accepted Answer

the company should refer to the rebate as bonus.The word bonus is associated with spending,as opposed to words like "rebate",which are associated with saving.

Question 4

A rational valuation of an asset is based on:
A)What the asset is currently worth on the market.
B)The time that had passed since purchasing the asset,including depreciation.
C)What the asset cost at the time it was purchased.
D)The transaction utility of the purchase.

Accepted Answer

Rational valuation of an asset is based on its current market worth, reflecting its present value rather than its historical cost, depreciation, or the utility derived from its purchase.

Question 5

The acquisition utility derived from buying a good is a function of the price paid for the good and its objective value.

Accepted Answer

The acquisition utility is a function of the price paid for the good and its perceived value, not its objective value. It reflects the consumer's subjective assessment of the deal they are getting, rather than any objective measure of the good's worth.

Question 6

What is a possible explanation for the observed preference reversal of voters between choices that are evaluated separately and choices that are evaluated simultaneously?

Accepted Answer

The answer of What is a possible explanation for the...

Question 7

What explanation does the book provide for the fact that people are loss-averse,but still accept the sure loss of paying insurance?
A)The vividness of the possibility of losing a big amount of money if they are uninsured leads people to overestimate their risk.
B)The special value pseudocertainty has.
C)Social norms that favor having insurance.
D)All of the above.

Accepted Answer

The book explains that people's loss aversion, yet willingness to pay for insurance, can be attributed to a combination of factors: the vividness of potentially losing a large sum if uninsured, the value placed on the certainty that insurance provides, and social norms that encourage having insurance.

Question 8

The chapter identifies three steps of making a risky choice free of the biasing effect of reference points.What are these three steps?

Accepted Answer

The answer of The chapter identifies three steps of making...

Question 9

In choices that involve uncertainty,our judgments are affected not only by the framing of the choice in terms of the level risk,but also by the framing of the choice in terms of gains or losses.

Accepted Answer

This statement is true. Research has shown that people are more likely to take risks when framed as potential gains, and more likely to avoid risks when framed as potential losses.

Question 10

Richard Thaler distinguished between a product's acquisition utility and transactional utility.On which of these two types does the product's seller has control,and how?

Accepted Answer

The answer of Richard Thaler distinguished between a product's acquisition...

Question 11

How can a sure loss be presented in a less unattractive way?
A)Framing the loss in pseudocertain terms.
B)Framing the sure loss in probability terms,having a 100% probability.
C)Emphasizing the low degree of risk.
D)None of the above.

Accepted Answer

The answer of How can a sure loss be presented...

Question 12

A drug company has developed a vaccine that protects against Hepatitis C and Hepatitis B,but not against Hepatitis A.Which of the following is the recommended way to present this new pill?
A)67% protection from all types of Hepatitis.
B)Protects you from 2 out of 3 types of Hepatitis.
C)Full protection against Hepatitis B and Hepatitis C.
D)Leaves you at only 33% risk of Hepatitis.

Accepted Answer

C is the most accurate and straightforward way to communicate the vaccine's effectiveness, specifying exactly which types of Hepatitis it protects against without implying any misleading statistics or generalizations.

Question 13

In negotiations,the endowment effect creates a bias primarily in seller's evaluations.

Accepted Answer

The endowment effect is a cognitive bias where individuals value an item they own more than an identical item that they do not own. In negotiations, this can create a bias for sellers who may overvalue their own goods or assets simply because they feel a sense of ownership over them. This can make it more difficult for them to come to agreements or compromises that are mutually beneficial.

Question 14

A software company is looking to recruit a new programmer.There are two candidates for the position.The candidates' Grade Point Averages are given,along with the number of programs each of them has written. According to the evaluability hypothesis,which of the candidates will be preferred in case they are evaluated separately,and why?
A)Candidate X,because GPA is harder to evaluate than experience.
B)Candidate Y,because GPA is easier to evaluate than experience.
C)Candidate X,because experience is harder to evaluate than GPA.
D)Candidate Y,because experience is easier to evaluate than GPA.

Accepted Answer

DThe evaluability hypothesis suggests that attributes that are easier to evaluate (like GPA) will be given more weight when options are evaluated separately. Candidate X, with a presumably higher GPA, would be preferred if GPA is easier to evaluate, as indicated in choice C. Conversely, if experience (number of programs written) is considered easier to evaluate, Candidate Y would be preferred, as stated in choice D. This reflects the dual aspect of the evaluability hypothesis, where the ease of evaluating an attribute can shift preference depending on the context of evaluation.

Question 15

A firm has exceeded its revenue forecast for the year,and wishes to share some of the surplus with its employees.Outline the bonus scheme that is likely to generate higher levels of satisfaction from the employees,and explain why.

Accepted Answer

The answer of A firm has exceeded its revenue forecast...

Question 16

Daniel and Jeremy are brothers.They have found out in advance about what their parents are giving them for Christmas,and have agreed to exchange each other's gifts.When should the exchange be made,in order for the two brothers to be the most satisfied with it?
A)Before opening the presents.
B)Right after opening the presents.
C)A few weeks after receiving the presents,after getting tired of what they received.
D)Answers a and b have equal likelihoods of creating satisfaction.

Accepted Answer

Exchanging gifts before opening them ensures that both brothers receive the gift they actually want, leading to greater satisfaction.

Question 17

Since losses loom larger than gains,a big loss upsets us more than two smaller losses of the same total amount.

Accepted Answer

The concept of "loss aversion" suggests that people feel the pain of losses more acutely than the pleasure of equivalent gains, but it doesn't necessarily imply that a big loss is more upsetting than two smaller losses of the same total amount. In fact, people might prefer to break down losses into smaller parts to make them more manageable.

Question 18

The certainty effect posits that a reduction of the probability of an outcome will be more meaningful when the outcome was initially _______ than when it was __________ .

Accepted Answer

The answer of The certainty effect posits that a reduction...

Question 19

A firm has exceeded its revenue forecast for the year,and wishes to share some of the surplus with its employees.Which of the following schemes is likely to generate higher levels of satisfaction from the employees?
A)Giving bi-monthly bonuses,with the each bonus slightly smaller than the previous one.
B)Giving bi-monthly bonuses,with each bonus slightly larger than the previous one.
C)Giving bi-monthly bonuses of equal amounts.
D)Giving one big bonus at the beginning of the year.

Accepted Answer

Giving bi-monthly bonuses that increase in amount each time will likely generate higher levels of satisfaction from employees as they will see that the company is consistently rewarding their efforts and their hard work is being recognized. This approach also keeps the excitement and motivation going throughout the year rather than just one big bonus at the beginning of the year or decreasing bonuses over time.

Question 20

A city councilman wants to allocate funds for a program to highlight the city's historical heritage.The mayor is opposing this plan,but has agreed to bring it for vote at the next city council meeting.How should the mayor present this issue at the meeting,in order to reduce the likelihood of its approval by the city council?

Accepted Answer

The answer of A city councilman wants to allocate funds...

Quiz 5: Framing and the Reversal of Preferences

What accounts for the high rate of auctions on eBay that fail to reach a sale?

A product's transactional utility is contingent upon:

A credit card company wants to market a new scheme for its clients,offering them 5% of their yearly spending as a cash gift at the end of the year.How should the company refer to this rebate,and why?

A rational valuation of an asset is based on:

The acquisition utility derived from buying a good is a function of the price paid for the good and its objective value.

What is a possible explanation for the observed preference reversal of voters between choices that are evaluated separately and choices that are evaluated simultaneously?

What explanation does the book provide for the fact that people are loss-averse,but still accept the sure loss of paying insurance?

The chapter identifies three steps of making a risky choice free of the biasing effect of reference points.What are these three steps?

In choices that involve uncertainty,our judgments are affected not only by the framing of the choice in terms of the level risk,but also by the framing of the choice in terms of gains or losses.

Richard Thaler distinguished between a product's acquisition utility and transactional utility.On which of these two types does the product's seller has control,and how?

How can a sure loss be presented in a less unattractive way?

A drug company has developed a vaccine that protects against Hepatitis C and Hepatitis B,but not against Hepatitis A.Which of the following is the recommended way to present this new pill?

In negotiations,the endowment effect creates a bias primarily in seller's evaluations.

A firm has exceeded its revenue forecast for the year,and wishes to share some of the surplus with its employees.Outline the bonus scheme that is likely to generate higher levels of satisfaction from the employees,and explain why.

Daniel and Jeremy are brothers.They have found out in advance about what their parents are giving them for Christmas,and have agreed to exchange each other's gifts.When should the exchange be made,in order for the two brothers to be the most satisfied with it?

Since losses loom larger than gains,a big loss upsets us more than two smaller losses of the same total amount.

The certainty effect posits that a reduction of the probability of an outcome will be more meaningful when the outcome was initially _ than when it was ____ .

A firm has exceeded its revenue forecast for the year,and wishes to share some of the surplus with its employees.Which of the following schemes is likely to generate higher levels of satisfaction from the employees?