Deck 8: Behavioral Economics

Question 1

According to behavioral economics, temptation to make harmful decisions can be overcome by presenting decision makers with better information and more options.

Answer 1

False

Question 2

Both neoclassical and behavioral economics believe that people are mostly rational in both their decision making and their actions.

Answer 2

False

Question 3

Heuristics help people make faster, error-free decisions.

Answer 3

False

Question 4

Placement of goods in grocery and other retail stores is often done with the objective of encouraging impulse buying.

Question 5

Hardwired heuristics make it easy to change behavior by simply presenting people with better information.

Question 6

Heuristics generally help people make faster decisions.

Question 7

Heuristics can be exploited to lead people to positive outcomes.

Question 8

Recognition heuristics help advertisers gain customers.

Question 9

Neoclassical theory suggests that to the extent impulse buying occurs, it is infrequent and does not affect the ability of economic models to predict behavior.

Question 10

Heuristics generally help people to make decisions faster, but also to make more errors.

Question 11

Between System 1 and System 2 in the brain, System 1 makes most of the decisions.

Question 12

Heuristics generally operate in brain System 2.

Question 13

Behavioral economists believe that while people try to make rational decisions, they are frequently subject to systematic errors.

Question 14

Neoclassical and behavioral economics are generally viewed as complementary.

Question 15

Behavioral economics observes that people generally do not act according to their self-interest.

Question 16

Behavioral economics recognizes that people frequently make errors, but these errors generally cancel out in such a way that neoclassical models are sufficient for predicting economic outcomes.

Question 17

A key difference between neoclassical economics and behavioral economics is that in behavioral economics, context affects preferences.

Question 18

Heuristics generally help people make fewer errors in their decisions.

Question 19

System 1 is the part of the brain that carefully weighs the benefits and costs when making decisions.

Question 20

Neoclassical economics and behavioral economics both recognize that people make errors in their decision making.

Question 21

Behavioral economists avoid dealing with fairness concerns because the concept is too subjective.

Question 22

The overconfidence effect exists when people underestimate their chances of being wrong.

Question 23

Because of framing effects, a worker will be happy with a 5 percent raise regardless of how much of a raise her fellow employees receive.

Question 24

People who engage in mental accounting are more likely to purchase overpriced warranties.

Question 25

People feel losses about two and a half times more intensely than they feel gains.

Question 26

Precommitments must impose costs on people to be effective.

Question 27

According to behavioral economists, people tend to put too much weight on the future when they make decisions.

Question 28

According to behavioral economists, self-control problems generally result from poor information.

Question 29

Isolating transactions from the overall set of consumption options is known as anchoring.

Question 30

Anchoring leads people to consider irrelevant information when making decisions.

Question 31

Precommitments are a tool designed to overcome time inconsistency.

Question 32

Time inconsistency refers to the phenomenon where your present self misjudges what your future self will do.

Question 33

Firms would rather shrink package sizes than raise prices because consumers will feel less of a loss from the change in package size.

Question 34

Framing effects may cause the same person to view the same new situation differently depending on whether that new situation makes him or her better or worse off.

Question 35

The self-serving bias causes people to act only in their self-interest.

Question 36

The endowment effect describes when people value a good more when they own it than when they don't.

Question 37

The presence of framing effects influences how sellers present their products to consumers.

Question 38

Time inconsistency refers to the persistent underestimation of how long a task will take to perform.

Question 39

Prospect theory and the work of behavioral economists confirm that consumers are economically rational.

Question 40

The availability heuristic refers to people purchasing what is most easily accessible.

Question 41

When people change their decision just because the context of the given information is changed, we call that the "framing effect."

Question 42

The dictator and ultimatum games reveal that fairness and concern for others motivate people's behavior.

Question 43

The low-energy mental shortcuts, or heuristics, that the human brain commonly employs is one major reason for the systematic errors in decision making that people make, which is the focus of behavioral economics.

Question 44

One major point of disagreement between neoclassical economics and behavioral economics is the assumption of rationality.

Question 45

Neoclassical economics focuses on predicting the behavior of economic agents, whereas behavioral economics focuses on the mental processes involved in decision making.

Question 46

The status quo effect suggests that giving people more options is always good for them.

Question 47

The threat of rejection is part of what makes the invisible hand a valid metaphor for how the market system works.

Question 48

One major tenet of behavioral economics is that the human brain is prone to commit errors in perception.

Question 49

Behavioral economics demonstrates that the threat of rejection makes people less likely to engage in transactions.

Question 50

Behavioral economics hopes to eventually fully replace the neoclassical economic model.

Question 51

When people often blame an "act of nature" or their colleagues for their plans going awry, they are illustrating the cognitive bias known as the overconfidence effect.

Question 52

Behavioral economics developed as a field of study that looks into how people make rational decisions based on self-interest.

Question 53

One consequence of the confirmation bias is that many people believe that they could "beat the (stock)market."

Question 54

Dictators/proposers tend to act more self-interested when playing the dictator game versus the ultimatum game.

Question 55

Neoclassical economics and behavioral economics are similar in the assumption that people are capable of making accurate, sometimes complex, calculations with respect to their utility-maximizing decisions.

Question 56

Results of the dictator and ultimatum games reveal that people act in equally self-interested ways, regardless of the context or rules of the game.

Question 57

The endowment effect makes people value things less when they think of those things as their own as opposed to identical things that are not theirs-as in "the grass is greener on the other side."

Question 58

"Loss aversion" helps explain why people buy insurance policies with lower deductibles even though the policies are more expensive.

Question 59

The anchoring effect suggests that when people are made to think of large abstract numbers before they go shopping, many of them will subsequently be willing to pay higher prices for stuff.

Question 60

The "hedonic treadmill" of prospect theory suggests that if people's incomes rise and stay at the new higher level, then their feelings of satisfaction also rise and stay at the new higher level.

Question 61

Which of the following best explains the difference between neoclassical economics and behavioral economics?

A)Neoclassical economics believes that government should play a minimal role in the economy, while behavioral economics calls for a more active role for government.
B)Neoclassical economics assumes that people are rational in their decision making, while behavioral economics believes people make systematic errors.
C)There is no real difference; behavioral economics just studies more intently how the rational decision-making process works.
D)Neoclassical economics no longer offers valid explanations for economic outcomes, while behavioral economics does.

Question 62

The many quirky decisions that people often make, which behavioral economics have found and analyzed, are so ingrained in the human psyche that there is nothing that policymakers can do about helping people make better choices for themselves.

Question 63

The idea of "nudging" people into certain choices is one major contribution of behavioral economics to policy making.

Question 64

Suppose Justine and Sarah are playing the dictator game. Justine is the dictator and has $150 to allocate. Based on repeated experiments of the dictator game, what amounts, on average, are Justine and Sarah most likely to receive?

A)$150 for Justine and $0 for Sarah.
B)$87 for Justine and $63 for Sarah.
C)$75 for Justine and $75 for Sarah.
D)$0 for Justine and $150 for Sarah.

Question 65

Huxley lost $100 in the stock market. According to behavioral economics research, how much of a gain would he have to experience to offset the feeling of loss and have no net change in utility?

A)$100
B)$250
C)$40
D)$150

Question 66

Self-control problems, say, among people on a diet, is caused by the cognitive bias known as time inconsistency.

Question 67

According to behavioral economics research, in which of the following cases would we expect a person to experience no net change in their utility?

A)When the person gains $50 and loses $50.
B)When the person gains $50 and loses $20.
C)When the person gains $20 and loses $50.
D)When the person gains $20 while everyone else gains $20.

Question 68

Suppose Ryan and Rita were randomly shown the numbers 25 and 67, respectively, and then asked to estimate the price of an item about which they have relatively limited knowledge. According to findings from behavioral economics, we would expect

A)Ryan to estimate a price higher than what Rita would estimate.
B)Ryan to estimate a price lower than what Rita would estimate.
C)Ryan to estimate a price about the same as what Rita would estimate.
D)the randomly shown numbers to have no influence on their estimates.

Question 69

Tony ran a marathon in 3.6 hours; his performance last year on the same course was 3.3 hours. Stacey ran the same marathon in 3.6 hours; her previous time was 3.8 hours. According to behavioral economists, and based solely on the information given, we would expect

A)Tony to feel good about his performance, and Stacey to feel good about hers.
B)Tony to feel bad about his performance, and Stacey to feel good about hers.
C)Tony to feel bad about his performance, and Stacey to feel bad about hers.
D)Tony to feel good about his performance, and Stacey to feel bad about hers.

Question 70

Rosa received a corgi pillow as a raffle prize; she would have been willing to pay $18 to buy it herself. Based on the endowment effect, we would expect Rosa to be willing to sell the pillow

A)for some amount less than $18.
B)only if she is offered more than $18.
C)for the $18 she would have been willing to pay for the pillow.
D)under no circumstances whatsoever.

Question 71

Sellers' sense of fairness is always consistent with the notion of rational self-interest of neoclassical economics.

Question 72

Sellers' sense of fairness in pricing can sometimes lead them to pricing decisions that do not maximize profits.

Question 73

Automatic payroll deductions help people to fight their time inconsistency problem with regards to saving.

Question 74

Suppose Faith and Mickey are playing both dictator and ultimatum games. Faith is the dictator/proposer and has $400 to allocate. Based on repeated experiments of the dictator and ultimatum games, what payouts to Faith would be most consistent with the findings of behavioral economists?

A)Faith receives $400 from the dictator game and $350 from the ultimatum game.
B)Faith receives $200 from the dictator game and $168 from the ultimatum game.
C)Faith receives $200 from the dictator game and $200 from the ultimatum game.
D)Faith receives $235 from the dictator game and $210 from the ultimatum game.

Question 75

Which of the following assumptions about human behavior is most likely to be accepted by behavioral economists?

A)People have preferences that are unstable and vary by context.
B)People are almost entirely self-interested in their behavior.
C)People plan out decisions well and possess lots of willpower.
D)People eagerly and accurately calculate the benefits and costs of their decisions.

Question 76

Parker's shares of stock in ACME Corporation lost $10 in value, but his shares in XYZ, Inc. gained $18. According to behavioral economics research, how would Parker feel as a result of these changes?

A)Parker would feel better off.
B)Parker would feel worse off.
C)Parker would feel about the same.
D)Behavioral economics research suggest that the intensity of losses versus gains follows no measurable pattern.

Question 77

Riley has a new tennis racket for which she paid $75. Haley would like to buy the racket from Riley. Assuming Riley's decision is only influenced by the endowment effect, which of the following amounts would most likely represent how much Riley would have to receive to be willing to sell the racket?

A)$75
B)$100
C)$50
D)$20

Question 78

Suppose Justine and Sarah are playing the ultimatum game. Justine is the proposer, has $30 to allocate, and Sarah can accept or reject the offer. Based on repeated experiments of the ultimatum game, what combination of payouts to Justine and Sarah is most likely to occur?

A)$30 for Justine and $0 for Sarah
B)$16 for Justine and $14 for Sarah
C)$20 for Justine and $10 for Sarah
D)$0 for Justine and $30 for Sarah

Question 79

Suppose Faith and Mickey are playing both dictator and ultimatum games. Faith is the dictator/proposer and has $1,000 to allocate. Based on repeated experiments of the dictator and ultimatum games, what payouts to Mickey would be most consistent with the findings of behavioral economists?

A)Mickey receives $0 from the dictator game and $100 from the ultimatum game.
B)Mickey receives $500 from the dictator game and $420 from the ultimatum game.
C)Mickey receives $500 from the dictator game and $500 from the ultimatum game.
D)Mickey receives $420 from the dictator game and $470 from the ultimatum game.

Question 80

Suppose Justine and Sarah are playing the dictator game. Justine is the dictator and has $120 to allocate. Based on repeated experiments of the dictator game, what is the least likely outcome for this game?

A)$120 for Justine and $0 for Sarah.
B)$70 for Justine and $50 for Sarah.
C)$60 for Justine and $60 for Sarah.
D)$0 for Justine and $120 for Sarah.