Question 1

An individual's certainty equivalent is the amount of money the individual must receive with certainty in order to attain the same level of expected utility as the gamble.

Accepted Answer

A) True 
 B)False  True

Question 2

Under expected utility theory, if poor individuals receive the same utility from an additional dollar as a wealth individual, then preferences are best described with a non-linear utility function.

Accepted Answer

A) True 
 B)False  False

Question 3

Sherry has two choices. She can either receive $\$ 8$ or a lottery ticket that pays $\$ 40$ with a $50 \%$ chance and $\$ 10$ with a $50 \%$ chance. Sherry rejects the lottery ticket unless her preferences are given by which of the following?

Accepted Answer

A)  $U(x)=2 \exp ^{-.01 x}$ 
B)  $\quad U(x)=\ln (x)$ 
C)  $U(x)=\sqrt{x}$ 
D)  $U(x)=\frac{x^{\frac{1}{4}}}{\frac{1}{4}}$ 
A)  $U(x)=2 \exp ^{-.01 x}$ 
B)  $\quad U(x)=\ln (x)$ 
C)  $U(x)=\sqrt{x}$ 
D)  $U(x)=\frac{x^{\frac{1}{4}}}{\frac{1}{4}}$ D

Question 4

Segmentation Independence refers to which concept?

Accepted Answer

A)  The available choices do not change based on how they are grouped together. 
B)  When all decision-makers make choices simultaneously they make the same choices. 
C)  Decisions of a single individual do not change based on how they are grouped together. 
D)  Elements of your choice set can be broken into smaller pieces. 
A)  The available choices do not change based on how they are grouped together. 
B)  When all decision-makers make choices simultaneously they make the same choices. 
C)  Decisions of a single individual do not change based on how they are grouped together. 
D)  Elements of your choice set can be broken into smaller pieces.

Question 5

There is an objective way to measure whether a set of decisions has been narrowly bracketed or broadly bracketed.

Accepted Answer

A) True 
 B)False

Question 6

If Sherry's preferences are given by $U(x)=\sqrt{x}$ what is her certainty equivalent of taking a gamble that consists of $\$ 100$ with a $25 \%$ chance and $\$ 25$ with a $75 \%$ chance?

Accepted Answer

The answer of If Sherry's preferences are given by $U(x)=\sqrt{x}$...

Question 7

Narrow bracketing of investments in a portfolio of risk assets can lead to which of the following except:

Accepted Answer

A)  Excess exposure to risk. 
B)  Under exposure to risk. 
C)  Optimal exposure to risk. 
D)  No risk in the portfolio. 
A)  Excess exposure to risk. 
B)  Under exposure to risk. 
C)  Optimal exposure to risk. 
D)  No risk in the portfolio.

Question 8

The following statements about excepted utility theory are all equivalent except:

Accepted Answer

A)  For all gambles an individual's certainty equivalent equals $0, x_{C E}=0$ 
B)  $\mathrm{E}(\mathrm{u}(\mathrm{x}))=\mathrm{u}(\mathrm{E}(\mathrm{x}))$ 
C)  The individual is risk averse. 
D)  The individual is risk-neutral. 
A)  For all gambles an individual's certainty equivalent equals $0, x_{C E}=0$ 
B)  $\mathrm{E}(\mathrm{u}(\mathrm{x}))=\mathrm{u}(\mathrm{E}(\mathrm{x}))$ 
C)  The individual is risk averse. 
D)  The individual is risk-neutral.

Question 9

Suppose I know that Holly always has a certainty equivalent $\left(x_{C E}\right)$ equal to 0 . Which of the following utility functions describes Holly's preferences?

Accepted Answer

A) $\mathrm{U}(\mathrm{x})=\ln (\mathrm{x})$ B) $\mathrm{U}(\mathrm{x})=\mathrm{x}$ C) $\mathrm{U}(\mathrm{x})=\mathrm{x}$ if $\mathrm{x}>0$ and $\mathrm{U}(\mathrm{x})=-2 \mathrm{x}$ if $\mathrm{x}<=0$ D) $U(x)=\sqrt{x}$ A) $\mathrm{U}(\mathrm{x})=\ln (\mathrm{x})$ B) $\mathrm{U}(\mathrm{x})=\mathrm{x}$ C) $\mathrm{U}(\mathrm{x})=\mathrm{x}$ if $\mathrm{x}>0$ and $\mathrm{U}(\mathrm{x})=-2 \mathrm{x}$ if $\mathrm{x}<=0$ D) $U(x)=\sqrt{x}$

Question 10

All of the following have been suggested as causes for narrow bracketing except:

Accepted Answer

A)  Timing of decisions 
B)  Social heuristics. 
C)  Not knowing one's utility function. 
D)  Motivation. 
A)  Timing of decisions 
B)  Social heuristics. 
C)  Not knowing one's utility function. 
D)  Motivation.

Question 11

On page 6-21 and 6-22, there is a discussion about how people have under-invested in stocks relative to bonds which can be explained by bracketing. Explain the argument?

Accepted Answer

Individuals bracket their investments ba

Question 12

The following statements about excepted utility theory are all equivalent except:

Accepted Answer

A)  For all gambles an individual's certainty equivalent is always greater than $0, x_{C E}>0$ 
B)  If $x^{\prime}>x^{\prime \prime}$ then the slope of $u(x)$ is greater at $u\left(x^{\prime \prime}\right)$ then at $u\left(x^{\prime}\right)$. 
C)  The individual is risk averse. 
D)  The individual is risk-neutral. 
A)  For all gambles an individual's certainty equivalent is always greater than $0, x_{C E}>0$ 
B)  If $x^{\prime}>x^{\prime \prime}$ then the slope of $u(x)$ is greater at $u\left(x^{\prime \prime}\right)$ then at $u\left(x^{\prime}\right)$. 
C)  The individual is risk averse. 
D)  The individual is risk-neutral.

Question 13

The difference between narrow bracketing and broad bracketing is the number of decisions that are bracketed together.

Accepted Answer

A) True 
 B)False

Question 14

Narrow bracketing can lead to addiction because I consider the benefits of my addictive behavior today separately from the costs it will impose on me tomorrow.

Accepted Answer

A) True 
 B)False

Question 15

Raul is trying to plan what to do on Saturday. He will do one leisure activity in the afternoon and one chore in the morning. His two leisure activity choices are a movie and hiking and his two chore choices are paying bills and mowing the law. He prefers hiking to going to the movies only if it's sunny. And prefers mowing the lawn over paying the bills only if it's sunny. However, what's most important to Raul is to not over-exert himself: mowing the lawn and hiking on the same day is too much activity for Raul.
a. Raul wakes up on Saturday and sees that it's sunny. If the decision for the Saturday's activities is taken simultaneously, how does Raul rank the activities: U(morning activity, afternoon activity)? (Hint: there may be more than one correct answer). $\max _{\text {morning activity } \in(\text { mow,bills })} U$ (morning activity). Choice of morning activity is to mow.
c. It is still sunny in the afternoon when Raul must decide which leisure activity to do. Write down Raul's decision problem in the afternoon and his choice.
$\max _{\text {afternoon activity } \in(\text { hike,movie })} U($ afternoon activity|morning activity). Choice of afternoon activity is to go to the movies.
d. Is Raul better off making decisions sequentially or simultaneously?
 Simultaneously. If he had known that it would be sunny all day he would have preferred to do the bills in the morning and then go hiking in the afternoon.
However, he wasn't sure whether the sun would stay out and so he made his choice in the morning only based off his preference for mowing and paying the bills.

Accepted Answer

U(bills, hike) @#LAT-DLM& mow, movie @#LAT-DLM& bills, movie

Question 16

Social heuristics refer to the cues our society gives us on how to bracket our decisions. One such example is the Food Pyramid, which tells us how much of each food group to eat every day.

Accepted Answer

A) True 
 B)False

Question 17

I live for two time periods: today and tomorrow. At the beginning of today, I must choose to smoke cigarettes or not smoke cigarettes. On the first day that I smoke cigarettes, I receive a utility of $2 \bar{u}$ and pay a cost of $c$. I only receive a utility $\bar{u}$ from smoking on the second day and still pay cost $c$. But, I also receive a fraction of utility from yesterday's smoking $\delta \in$ $(0,1)$. If I choose not to smoke on a given day, then my utility is 0 . Let $\bar{u}=10$, and $c=22$. I am risk neutral.
a. If I do not choose to start smoking today, will I choose to smoke tomorrow? No. My utility from today is 0 and my utility tomorrow will be -12 if I choose to smoke and 0 if I choose not to smoke.
b. Suppose $\delta=0$, that is, I carry no utility from smoking today into tomorrow. If I choose to smoke today, will I quit tomorrow?
 No. $U($ smoke, smoke $)=u($ today $)+u($ tomorrow $)=(2 * 10-22)+$ $(20+10-22)=6 \cdot U($ smoke, no smoke $)=(2 * 10-22)+0=-2$.
d. What is the minimum level of $\delta$ that I will smoke today and tomorrow.
 $(20-22)+\delta 20+10-22 \geq 0$. This is always true if $\delta \geq \frac{7}{10}$.

Accepted Answer

No. @#LAT-DLM& smoke, smoke @#LAT-DLM& today @#LAT-DLM& tomorrow @#LAT-DLM& @#LAT-DLM& smo

Question 18

Why did the CEO fire the president in the first example? Can you replicate the calculations on page 1 and 2 and show that it is likely you would come to the same conclusion?

Accepted Answer

When grouped together there are 9 possib

Question 19

A decision-maker always arrives at different choices if he segments his decisions.

Accepted Answer

A) True 
 B)False

Question 20

Hedonic editing and framing concern how individuals evaluate events, whereas choice bracketing concerns how certain decisions are actually made.

Accepted Answer

A) True 
 B)False

An individual's certainty equivalent is the amount of money the individual must receive with certainty in order to attain the same level of expected utility as the gamble.

Under expected utility theory, if poor individuals receive the same utility from an additional dollar as a wealth individual, then preferences are best described with a non-linear utility function.

Sherry has two choices. She can either receive $\$ 8$ or a lottery ticket that pays $\$ 40$ with a $50 \%$ chance and $\$ 10$ with a $50 \%$ chance. Sherry rejects the lottery ticket unless her preferences are given by which of the following?

Segmentation Independence refers to which concept?

There is an objective way to measure whether a set of decisions has been narrowly bracketed or broadly bracketed.

If Sherry's preferences are given by $U(x)=\sqrt{x}$ what is her certainty equivalent of taking a gamble that consists of $\$ 100$ with a $25 \%$ chance and $\$ 25$ with a $75 \%$ chance?

Narrow bracketing of investments in a portfolio of risk assets can lead to which of the following except:

The following statements about excepted utility theory are all equivalent except:

Suppose I know that Holly always has a certainty equivalent $\left(x_{C E}\right)$ equal to 0 . Which of the following utility functions describes Holly's preferences?

All of the following have been suggested as causes for narrow bracketing except:

On page 6-21 and 6-22, there is a discussion about how people have under-invested in stocks relative to bonds which can be explained by bracketing. Explain the argument?

The following statements about excepted utility theory are all equivalent except:

The difference between narrow bracketing and broad bracketing is the number of decisions that are bracketed together.

Narrow bracketing can lead to addiction because I consider the benefits of my addictive behavior today separately from the costs it will impose on me tomorrow.

Social heuristics refer to the cues our society gives us on how to bracket our decisions. One such example is the Food Pyramid, which tells us how much of each food group to eat every day.

Why did the CEO fire the president in the first example? Can you replicate the calculations on page 1 and 2 and show that it is likely you would come to the same conclusion?

A decision-maker always arrives at different choices if he segments his decisions.

Hedonic editing and framing concern how individuals evaluate events, whereas choice bracketing concerns how certain decisions are actually made.

Rationality, Irrationality, and Rationalization

Transaction Utility and Consumer Pricing

Mental Accounting

Status Quo Bias and Default Options

The Winners Curse and Auction Behavior

Representativeness and Availability

Confirmation and Overconfidence

Decision Under Risk and Uncertainty

Prospect Theory and Decision Under Risk or Uncertainty

Disagreeing With Ourselves: Projection and Hindsight Biases

Naïve Procrastination

Committing and Uncommitting

Selfishness and Altruism

Fairness and Psychological Games

Trust and Reciprocity

Filters

Exam 6: Bracketing Decisions

An individual's certainty equivalent is the amount of money the individual must receive with certainty in order to attain the same level of expected utility as the gamble.

Under expected utility theory, if poor individuals receive the same utility from an additional dollar as a wealth individual, then preferences are best described with a non-linear utility function.

Sherry has two choices. She can either receive $8\$ 8$8 or a lottery ticket that pays $40\$ 40$40 with a 50%50 \%50% chance and $10\$ 10$10 with a 50%50 \%50% chance. Sherry rejects the lottery ticket unless her preferences are given by which of the following?

Segmentation Independence refers to which concept?

There is an objective way to measure whether a set of decisions has been narrowly bracketed or broadly bracketed.

If Sherry's preferences are given by U(x)=xU(x)=\sqrt{x}U(x)=x​ what is her certainty equivalent of taking a gamble that consists of $100\$ 100$100 with a 25%25 \%25% chance and $25\$ 25$25 with a 75%75 \%75% chance?

Narrow bracketing of investments in a portfolio of risk assets can lead to which of the following except:

The following statements about excepted utility theory are all equivalent except:

Suppose I know that Holly always has a certainty equivalent (xCE)\left(x_{C E}\right)(xCE​) equal to 0 . Which of the following utility functions describes Holly's preferences?

All of the following have been suggested as causes for narrow bracketing except:

On page 6-21 and 6-22, there is a discussion about how people have under-invested in stocks relative to bonds which can be explained by bracketing. Explain the argument?

The following statements about excepted utility theory are all equivalent except:

The difference between narrow bracketing and broad bracketing is the number of decisions that are bracketed together.

Narrow bracketing can lead to addiction because I consider the benefits of my addictive behavior today separately from the costs it will impose on me tomorrow.

Social heuristics refer to the cues our society gives us on how to bracket our decisions. One such example is the Food Pyramid, which tells us how much of each food group to eat every day.

Why did the CEO fire the president in the first example? Can you replicate the calculations on page 1 and 2 and show that it is likely you would come to the same conclusion?

A decision-maker always arrives at different choices if he segments his decisions.

Hedonic editing and framing concern how individuals evaluate events, whereas choice bracketing concerns how certain decisions are actually made.

Rationality, Irrationality, and Rationalization

Transaction Utility and Consumer Pricing

Mental Accounting

Status Quo Bias and Default Options

The Winners Curse and Auction Behavior

Representativeness and Availability

Confirmation and Overconfidence

Decision Under Risk and Uncertainty

Prospect Theory and Decision Under Risk or Uncertainty

Disagreeing With Ourselves: Projection and Hindsight Biases

Naïve Procrastination

Committing and Uncommitting

Selfishness and Altruism

Fairness and Psychological Games

Trust and Reciprocity

Filters

Sherry has two choices. She can either receive $\$ 8$ or a lottery ticket that pays $\$ 40$ with a $50 \%$ chance and $\$ 10$ with a $50 \%$ chance. Sherry rejects the lottery ticket unless her preferences are given by which of the following?

If Sherry's preferences are given by $U(x)=\sqrt{x}$ what is her certainty equivalent of taking a gamble that consists of $\$ 100$ with a $25 \%$ chance and $\$ 25$ with a $75 \%$ chance?

Suppose I know that Holly always has a certainty equivalent $\left(x_{C E}\right)$ equal to 0 . Which of the following utility functions describes Holly's preferences?