Deck 3: Gut Feelings and Effortful Thinking

Question 1

Which of the following Is NOT an example of System 1 thinking:

A) Orient to the source of a sudden sound.
B) Complete the phrase "bread and …".
C) Detect expressions on a face.
D) Park in a narrow space.

Answer 1

Park in a narrow space.

Question 2

Which of the following is NOT an example of System 2 thinking:

A) Detect that one object is more distant than another.
B) Focus on the voice of a particular person in a crowded room.
C) Monitor the appropriateness of one's behaviour in a social situation.
D) Check the validity of a complex logical argument.

Answer 2

Detect that one object is more distant than another.

Question 3

The current interest rate is 5%. Tiara's implicit discount rate is the same as the market interest rate and her beta is 1 (one). Tiara is indifferent between $1000 in one year and (approx.):

A) $1000 today.
B) $1052 today.
C) $852 today.
D) $952 today.

Answer 3

$952 today.

Question 4

Given a choice of $1000 today and $1100 in one year, Izzy chose to take the $1000 today, while Olivia chose to take $1100 in one year from today. This implies that Izzy's implicit discount rate is ____, while for Olivia the implicit discount rate is _______:

A) More than 10%, More than 10%.
B) More than 10%; 10% or less.
C) Less than 10%; More than 10%.
D) Less than 10%; less than 10%.

Question 5

Todd takes the market interest rate of 10% as given. Todd's beta is 0.8. This implies that Todd's beta*delta is approx. _____ and that Todd will be indifferent between $1000 in one year and approx. _____ today.

A) 0.727; $727.
B) 0.8; $800.
C) 0.91; $910.
D) 0.762; $762.

Question 6

Patricia's implicit discount rate is the same as the market interest rate of 10%. This interest rate is not going to change in the foreseeable future. Patricia is looking to invest $1000 and wants to get the best possible return on this money. She is given the opportunity to buy one of two bonds: Bond A and Bond B. Both bonds can be purchased at a face value of $1000. Bond A will pay $1065 in one years' time. Bond B will pay $1120 in one years' time. Which of the following statements would be correct?

A) Patricia should buy Bond A but not Bond B.
B) Patricia should buy Bond B but not Bond A.
C) Patricia should buy neither Bond A nor Bond A and put the $1000 in a term deposit at 10% interest rate.
D) Patricia should buy neither Bond A nor Bond B because she is loss averse.

Question 7

Consider three students Ben, Jeff and Lennart. Ben is indifferent between $1000 today for $1100 in one year. Jeff is indifferent between $1000 today for $1200 in one year. Lennart is indifferent between $1000 today and $1250 in one year. Which of the following statements is correct?

A) Lennart is the least present biased among the three.
B) Jeff is the most present biased among the three.
C) Jeff's implicit discount factor (beta*delta) is 0.83.
D) Lennart's implicit discount factor (beta*delta) is 0.91.

Question 8

Consider three students Ben, Jeff and Lennart. Ben is indifferent between $1000 today for $1100 in one year. Jeff is indifferent between $1000 today for $1200 in one year. Lennart is indifferent between $1000 today and $1250 in one year. Which of the following statements is correct?

A) Lennart is the most present biased among the three.
B) Jeff is the least present biased among the three.
C) Ben's implicit discount factor (beta*delta) is 0.83.
D) Lennart's implicit discount factor (beta*delta) is 0.91.

Question 9

Consider three students Ben, Jeff and Lennart. Ben is indifferent between $1000 today for $1100 in one year. Jeff is indifferent between $1000 today for $1200 in one year. Lennart is indifferent between $1000 today and $1250 in one year. Which of the following statements is correct?

A) Lennart is the least present biased among the three.
B) Jeff is the most present biased among the three.
C) Ben's implicit discount factor (beta*delta) is approx. 0.91.
D) Lennart's implicit discount factor (beta*delta) is approx. 0.91.

Question 10

System 1 thinking is _____, while System 2 is _________. A good analogy is to think of System 1 as _____ and System 2 as _______.

A) Automatic; deliberative; an elephant that lurches into action immediately; a rider trying to steer an elephant.
B) Deliberative; automatic; an elephant that lurches into action immediately; a rider trying to steer an elephant.
C) Automatic; deliberative; a rider trying to steer an elephant; an elephant that lurches into action immediately.
D) Reflective; reflexive; a rider trying to steer to an elephant; an elephant that lurches into action immediately.

Question 11

The current market interest rate is 10%. Ignore any inflationary concerns. Rebecca says that her discount factor (delta) is determined by this market interest rate. However, she also states that she is willing to accept $1000 today or $1200 a year from today. This implies that Rebecca is asking for an effective interest rate of _____; her delta is approximately ______ and therefore her beta is approximately __________.

A) 20%; 0.909; 0.967.
B) 20%; 0.909; 1.
C) 20%; 0.967; 0.909.
D) 20%; 0.833; 0.909

Question 12

Nick takes the market interest rate of 10% as given. Nick's beta is 0.9. This implies that Nick's beta*delta is approx. _____ and that Nick will be indifferent between $1000 in one year and approx. _____ today.

A) 0.818; $818.
B) 0.727; $727.
C) 0.8; $800.
D) 0.91; $910.

Question 13

Izzy discounts future payoffs using an implicit discount rate of 5%. Her beta is equal to 0.8. This implies that Izzy's discount factor (beta*delta) is approximately:

A) 0.912.
B) 0.762.
C) 1.105.
D) 0.952.

Question 14

One reason for making inconsistent choices over time is that we tend to discount payoffs that occur in the future differently. Consider four students: Daniel, Liam, Jessie and Karishma. Each is asked what amount of money in one year's time it will take for him/her to forego $1000 today. For Daniel, this amount is $1100, for Liam and Jessie it is $1200 and for Karishma it is $1050. Which of the following statements is true?

A) Daniel is the most present biased among the four.
B) Liam and Jessie are the least present biased among the four.
C) Karishma is the least present biased among the four.
D) Daniel is the least present biased among the four.

Question 15

One reason for making inconsistent choices over time is that we tend to discount payoffs that occur in the future differently. Consider four students: Daniel, Liam, Jessie and Karishma. Each is asked what amount of money in one year's time it will take for him/her to forego $1000 today. For Daniel, this amount is $1100, for Liam and Jessie it is $1200 and for Karishma it is $1050. Which of the following statements is true?

A) Daniel is the most present biased among the four.
B) Liam and Jessie are the most present biased among the four.
C) Karishma is the most present biased among the four.
D) Daniel is the least present biased among the four.

Question 16

One reason for making inconsistent choices over time is that we tend to discount payoffs that occur in the future differently. Consider four students: Daniel, Liam, Jessie and Karishma. Each is asked what amount of money in one year's time it will take for him/her to forego $1000 today. For Daniel, this amount is $1100, for Liam and Jessie it is $1200 and for Karishma it is $1050. Which of the following rankings in terms of present bias true?

A) Karishma is more present biased than Daniel, who is more present biased than both Liam and Jessie.
B) Daniel is more present biased than both Liam and Jessie who in turn are more present biased than Karishma.
C) Liam and Jessie are more present biased than Daniel, who, in turn, is more present biased than Karishma.
D) Liam and Jessie are more present biased than Karishma, who, in turn, is more present biased than Daniel.

Question 17

Which of the following is NOT an example of the Sunk Cost Fallacy?

A) Alex bought tickets to a movie; he watch it till the end even though you found it really boring.
B) A country keeps fighting a war long after it becomes obvious that nothing remotely resembling victory is possible.
C) A politician keeps campaigning for a party nomination long after it becomes clear that success is not possible.
D) Claire bought a book; partway through she stops reading because it is really boring.

Question 18

Changing the default rule from opt-in to opt-out can be an effective way of changing behaviour such as increased savings or increased organ donation. This is an example of which phenomenon?

A) Priming.
B) Framing.
C) Sunk cost fallacy.
D) Conjunction fallacy.

Question 19

Auckland City Council is trying to decide how to cut down on speeding in areas that are particularly accident prone. Jessica suggests to the Council that a cheaper way of achieving this goal (as opposed to having police officers wait around with a speed radar) is to put up a large billboard with a pair of eyes and the slogan: Drive Safely; Stay within the speed limit. Here, Jessica is appealing to which psychological phenomenon?

A) Priming.
B) Framing.
C) Sunk cost fallacy.
D) Conjunction fallacy.

Question 20

Most people, if asked, tend to rate the probability of death from war and violence world-wide as being higher than that from respiratory illnesses. This is factually incorrect. The reason that people make this mistake can be attributed to:

A) The conjunction fallacy
B) The availability bias.
C) The sunk cost fallacy.
D) The anchoring heuristic.

Question 21

Suppose I asked you about the outcomes of a large number of international tennis matches. You have no idea who actually won or lost each match. So, for each match, you decide to pick a winner based on names that you have heard before. If you think you have heard the name before, you pick that person as having won the match. This is typically referred to as:

A) The availability bias.
B) The recognition heuristic.
C) The priming effect.
D) The framing effect.

Question 22

Human beings often tend to focus on "identified" lives rather than "statistical lives". Which of the following sentences is *NOT* an example of this phenomenon?

A) We often rate the probability of a subset of an event as being greater than the probability of the event itself.
B) A single death is a tragedy while numerous deaths become a statistic.
C) We spend billions of dollars thwarting low probability threats like terrorism, while devoting less resources to combating scourges like drunk driving or easily preventable diseases like malaria or cholera.
D) We become engrossed with the fate of the young soccer players trapped in a Thai cave, yet do not pay the same level of attention to hundreds of deaths from a tsunami in Indonesia.

Question 23

Suppose you are in charge of enforcing safe drinking rules in a restaurant, which caters to both young and old. Obviously, the restaurant must abide by the law, which says: If you are drinking alcohol, then you must be 21 or above. Obviously, you cannot go around and check every single patron; so, you are constrained to a few random checks. What should you check for?

A) Check a few people drinking to confirm that they are 21 or above; check a few of those who look less than 21 to confirm that they are not drinking.
B) Check a few people not drinking to confirm that they are 21 or above; check those who look less than 21 to confirm that they are drinking.
C) Check a few people drinking to confirm that they are 21 or above; check a few people not drinking to confirm that they are below 21.
D) Check a few people above 21 to make sure that they are drinking; check a few people who look less than 21 to make sure they are not drinking.

Question 24

Suppose the Auckland City Council decides that when they send out the letter to house-owners about their rates (taxes) for the year, it will include a statement of the following type. "Would you like to donate $10 to KidsCan (a charitable donation that helps children suffering from cancer)? If so, then please check the box below." An economist advised the Council that they would most likely raise a lot more money if they said the following instead. "Your current rates include a donation of $10 to KidsCan. If you DO NOT want to make this donation then please check the box below." In making this suggestion the economist is appealing to the:

A) The framing effect.
B) The priming effect.
C) The endowment effect.
D) Loss aversion.

Question 25

Suppose the Auckland City Council decides that when they send out the letter to house-owners about their rates (taxes) for the year, it will include a statement of the following type. "Would you like to donate to KidsCan (a charitable donation that helps children suffering from cancer)? You might like to know that the average donation is $20." In making this suggestion Auckland City Council is appealing to the:

A) The framing effect.
B) The priming effect.
C) The endowment effect.
D) Loss aversion.

Question 26

Suppose you take two groups of people and ask them to pick numbers out of two boxes. Except, the numbers in the two boxes are such that one group will always pick numbers between 1 and 30 while the other group will pick numbers between 60 and 90. Then you ask each group: What is the number of countries in the continent of Africa? Which of the following statements is true?

A) It is highly likely that the first group will, on average, come up with a number that is smaller than the number picked, on average by the second group. This is the "anchoring" effect.
B) It is highly likely that the first group will, on average, come up with a number that is larger than the number picked, on average by the second group. This is the "anchoring" effect.
C) It is highly likely that the first group will, on average, come up with a number that is smaller than the number picked, on average by the second group. This is the "availability" effect.
D) It is highly likely that the first group will, on average, come up with a number that is smaller than the number picked, on average by the second group. This is the "framing" effect.

Question 27

In a particular study, one group of respondents were asked: "Is the height of the tallest Redwood Tree, more or less than 1200 feet? What is your best estimate?" Another group was asked: "Is the height of the tallest Redwood Tree, more or less than 180 feet? What is your best estimate?" The average response for the first group was 844 feet while that for the second group was 252 feet. What factor(s) best explains this divergence?

A) Anchoring (and possibly priming).
B) Over-confidence.
C) Conjunction fallacy.
D) Regression to the mean.

Question 28

When you file for an income tax refund in the United States, the tax form typically has a question of the following type: "Would you like to donate $1 to the Environmental Defence Fund? Please check "Yes" or "No". Joshua believes that the authorities will be able to raise more money if they changed the question to: "We will include $1 to your taxes for the Environmental Defence Fund. Please check "No", if you do not wish to contribute.". In doing so, Joshua is appealing to:

A) The priming effect.
B) The framing effect.
C) The endowment effect.
D) Loss aversion.

Question 29

The current market interest rate is 5%. Ignore any inflationary concerns. Rebecca says that her discount factor (delta) is determined by this market interest rate. However, she also states that she is indifferent between $1000 today or $1250 a year from today. This implies that her delta is approximately ______ and therefore her beta is approximately __________.

A) 0.95; 0.84.
B) 0.95; 1.
C) 1; 0.84.
D) 0.84; 0.95.

Question 30

The Marshmallow Test for children is designed to explore which of the following concepts?

A) Loss aversion.
B) Immediate consumption arising out of the availability bias.
C) The law of diminishing marginal utility.
D) The choice between smaller-sooner and larger-later rewards.

Question 31

Tiara was given a choice between $1000 today and $1100 in one year. Tiara chose to take the $1000 today. This suggests that Tiara's implicit discount rate is ______ and therefore, her discount factor is ______.

A) Greater than 10%; Less than 0.91.
B) Less than 10%; Greater than 0.91.
C) Greater than 10%; Greater than 0.91.
D) Less than 10%; Less than 0.91.

Question 32

Which of the following would be an example of the "framing effect"?

A) Stating that the set of 7 letter words ending in "ING" is larger than the set of 7 letter words with "N" as the 6th letter.
B) Slowing down well below the speed limit when driving at the sight of police car.
C) Contributions to retirement saving account increase when a company moves from an opt-in to an opt-out savings plan.
D) Asking for a higher selling price for a good one already possesses compared to the price one is willing to pay for buying the same exact good.

Question 33

Which of the following would be an example of the "priming effect"?

A) Stating that the set of 7 letter words ending in "ING" is larger than the set of 7 letter words with "N" as the 6th letter.
B) Slowing down below the speed limit at the sight of a large billboard with a watching pair of eyes.
C) Contributions to retirement saving account increase when a company moves from an opt-in to an opt-out savings plan.
D) Asking for a higher selling price for a good one already possesses compared to the price one is willing to pay for buying the same exact good.

Question 34

A common finding in the literature is that, compared to men, women tend to shy away from competitive situations. However, a recent paper shows that if, prior to the competitive task, you ask women to focus on their professional identity as opposed to their gender identity, then women are likely to be as competitive as men. This phenomenon can most likely be attributed to which of the following:

A) Priming effect.
B) The conjunction fallacy.
C) Ego depletion theory.
D) Misunderstanding base rates.

Question 35

Rianna recently bought a book called "Experiments in Economics: Playing Fair with Money". A few pages into the book, she realized that the book was quite boring and not worth her time spent on reading it. However, Rianna thought: "I have spent the money buying the book. I might as well read through to the end." In doing so, Rianna is falling prey to:

A) The conjunction fallacy.
B) The sunk cost fallacy.
C) Ego depletion theory.
D) Misunderstanding base rates.

Question 36

Often, in order to decide whether a stranger is trustworthy, we look for ______ signals. An example of such a signal may be a ___________.

A) Hard to mimic; genuine ("Duchenne") smile.
B) Easy to mimic; firm handshake.
C) Hard to mimic; limp handshake.
D) Easy to mimic; fake smile.

Question 37

Lord, Ross and Lepper (1979) report the following:
48 undergraduates supporting and opposing capital punishment were exposed to 2 purported studies, one seemingly confirming and one seemingly disconfirming their existing beliefs about the deterrent efficacy of the death penalty. As predicted, both proponents and opponents of capital punishment rated those results and procedures that confirmed their own beliefs to be the more convincing and probative ones.
Behavioural scientists often explain findings such as these by appealing to the:

A) Confirmation heuristic.
B) Conjunction fallacy.
C) Hindsight bias.
D) Endowment effect.

Question 38

Believing that you knew the actual outcome all along and could have predicted this outcome after you have been told of this outcome is referred to as:

A) Confirmation heuristic.
B) Conjunction fallacy.
C) Hindsight bias.
D) Endowment effect.

Question 39

You are shown a set of four cards placed on a table. Each card has a NUMBER on one side and a LETTER on the other side. The first card has the number "3" on it. The second one has the number "8" on it. The third one has the letter "A" on it and the fourth card has the letter "D" on it. So, the visible faces of the cards show 3, 8, A and D, respectively. Which two card(s) must you turn over in order to test the truth of the proposition that if a card shows an ODD NUMBER on one face, then it has a VOWEL on its opposite face?

A) The "3" card and the "D" card.
B) The "3" card and the "A" card.
C) The "8" card and the "D" card.
D) The "8" card and the "A" card.

Question 40

A group of participants were split into two groups. The first group was asked: What is your best guess about the average height of Redwood trees? Is it more or less than 800 feet? The second group was asked: What is your best guess about the average height of Redwood trees? Is it more or less than 200 feet? The average response for the first group was 600 feet while that for the second group was 400 feet. On the basis of this, you would argue that the anchoring index in this case is:

A) 0.5 or 50%.
B) 1 or 100%.
C) 0.67 or 67%.
D) 1/3 or 33.33%.

Question 41

A group of participants were split into two groups. The first group was asked: What is your best guess about the average height of Redwood trees? Is it more or less than 800 feet? The second group was asked: What is your best guess about the average height of Redwood trees? Is it more or less than 200 feet? The average response for the first group was 800 feet while that for the second group was 200 feet. On the basis of this, you would argue that the anchoring index in this case is:

A) 0.5 or 50%.
B) 1 or 100%.
C) 0.67 or 67%.
D) 1/3 or 33.33%.

Question 42

Two groups of real estate agents were asked to name the true value of a house. Except one group was shown an asking price that was $200,000 higher than the second group. The responses demonstrated an anchoring index of 35%. This implies that:

A) The first group suggested an average price of $100,000 while the second suggested an average price of $135,000.
B) The average price suggested by the first group was $70,000 higher than the average price indicated by the second group.
C) The average price suggested by the first group was $35,000 higher than the average price indicated by the second group.
D) The first group suggested an average price of $200,000 while the second suggested an average price of $165,000.

Question 43

What is the difference between System 1 and System 2 thinking? When is relying on System 1 more appropriate? When is it not?

Question 44

The current market interest rate is 10%. Rebecca says that her decision-making is guided by this prevailing interest rate. She has $1000 that she is looking to invest. She says that she is looking to get at least a 20% return on her investment in one year. What does this imply for Rebecca's beta and delta? What is the minimum amount that Rebecca is willing to accept in order not to spend the $1000 now and invest it for the future?

Question 45

Provide a concise example of each of the following: (a) priming effect; (b) framing effect and (c) availability bias.

Question 46

What is the difference between "taste-based" and "statistical" discrimination? In discussing their results regarding Lakisha and Jamal being less employable than Emily or Greg, what do Bertrand and Mullainathan suggest as a possible cause? Is it taste-based or statistical discrimination or a third factor?

Question 47

Priming can often be useful in order to induce people to undertake desirable activities such as contributing to charity. But priming can also have a negative side. Discuss one example where priming ethnic and/or gender stereotypes lead to counter-productive results.

Question 48

Suppose the prevailing market interest (discount) rate is 5%. Consider two students Nathan and Nick, who each have $1000 at their disposal. Both of them are guided by the prevailing discount rate but differ in their betas. Suppose Nick is more present biased than Nathan. What amount will it take in one year's time for Nathan to forego consuming the $1000? How about Nick? What do these amounts imply for their discount factor (beta*delta)?