Deck 13: Behavioral Economics

Question 1

Behavioral economists:

A) rely primarily on data drawn from the real world.
B) 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.
C) avoid mathematical models of behavior, as they do not adequately describe real world actions.
D) typically assume that each individual has well-defined objectives and avoid mathematical models of behavior, as they do not adequately describe real world actions.

Answer 1

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.

Question 2

Neuroeconomics is a new field of economics motivated by the speculation that studying the human neural system can lead to:

A) a true mathematical model of utility theory.
B) a unified theory of decision making.
C) better laboratory experiments.
D) tenure.

Answer 2

a unified theory of decision making.

Question 3

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.

Answer 3

narrow framing.

Question 4

Which of the following does NOT describe an advantage of experiments?

A) With experiments, it is easier to determine whether people's choices are consistent with standard economic theory.
B) With experiments, it is often easier to establish causality.
C) With experiments, researchers can double check their assumptions and conclusions by testing and debriefing subjects.
D) It is generally cheaper to conduct experiments than it is to compute mathematical models.

Question 5

Which of the following concepts should be LEAST associated with behavior economics?

A) Choices that are hard to reconcile with standard economic theory
B) Rejection of highly-mathematical economic models
C) The use of laboratory experiments
D) Neuroeconomics

Question 6

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 7

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 8

Which of the following is true regarding the use of laboratory experiments in economic analysis?

A) Decisions made in the laboratory differ from those made in the real world.
B) Laboratory experiments introduce no additional influences on decision making.
C) Experimental subjects are often representative of the general population.
D) Economic analysis to date has never successfully employed laboratory experiments.

Question 9

Motivations for behavioral economics include:

A) people sometimes make choices that are inconsistent 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 sometimes make choices that are inconsistent with standard economic theory and standard economic theory can lead to unreasonable conclusions about consumer welfare.

Question 10

A person who uses a rule of thumb to determine the best rate of savings:

A) is necessarily making a mistake, since finding the best rate of savings involves complex mathematical models.
B) is necessarily making a mistake, since there is no single best rate of savings.
C) is not necessarily making a mistake because rules of thumb often arise out of trial and error or from observation of others' successful decisions.
D) is not necessarily making a mistake because, in the long run, all rates of savings turn out to yield the same economic benefit.

Question 11

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.

Question 12

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 describe reasons why the standard economic theory of decisions over time can be too restrictive.

Question 13

Which of the following explanations,if true,for the observation that 80% of your company's employees choose not to opt into the company's optional retirement plan would be the LEAST consistent with standard economic theory?

A) Company-sponsored retirement plans tend to have lower-than-average returns over the long run.
B) Company-sponsored retirement plans tend to have higher-than-average costs compared to other retirement saving instruments.
C) When confronted with alternatives, people sometimes avoid making a choice and end up with the option that is assigned as a default.
D) Across all employers, the average rate of retirement plan enrollment tends to be about 20%, which is consistent with the low demand for retirement plans.

Question 14

Identified departures from perfect rationality include:

A) incoherent choices.
B) bias towards the status quo.
C) anchoring.
D) All of these are identified departures from perfect rationality.

Question 15

Experiments:

A) make it easier to determine whether people's choices are consistent with standard economic theory, but can make it harder to establish causality.
B) often make it easier to establish causality, but can make it harder to determine whether people's choices are consistent with standard economic theory.
C) make it easier both to establish causality and to determine whether people's choices are consistent with standard economic theory.
D) make it harder both to establish causality and to determine whether people's choices are consistent with standard economic theory.

Question 16

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.

Question 17

Among the evidence that people do not always make choices that reflect sensible preferences are examples of:

A) choice reversals.
B) conformance to the principle of revealed preference.
C) compliance with the Ranking Principle.
D) All of these provide evidence that people do not always make choices that reflect sensible preferences.

Question 18

Disadvantages of experiments include the fact that:

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) decisions made in the laboratory replicate those made in the real world and the number of subjects is typically so large, that it is difficult to apply the results to economic behavior in the population.

Question 19

Behavioral economists:

A) rely primarily on data drawn from the real world.
B) rely primarily on experimental data.
C) often arrive at unreasonable conclusions about consumer welfare.
D) avoid mathematical models of behavior, as they do not adequately describe real world actions.

Question 20

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 21

A person is dynamically consistent if:

A) his preferences over the alternatives available at some future date change as the date approaches.
B) his preferences over the alternatives available at some future date do not change as the date approaches.
C) he does not always want to follow through on his plans and intentions.
D) he has complete self-control with occasional lapses.

Question 22

A person is dynamically consistent if:

A) lapses in his 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 are necessary for dynamic consistency.

Question 23

A person who is,all else equal,more willing to throw away a $20 shirt than a $200 shirt,even if both are worn out,is:

A) dynamically inconsistent.
B) dynamically consistent.
C) demonstrating sunk cost fallacy.
D) demonstrating pre-commitment.

Question 24

A person is dynamically consistent if:

A) his preferences over the alternatives available at some future date change as the date approaches.
B) his preferences over the alternatives available at some future date do not change as the date approaches.
C) he is also statically consistent.
D) None of these is correct.

Question 25

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 26

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 27

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 are sufficient for dynamic inconsistency.

Question 28

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) lapses in self-control and a tendency to ignore sunk costs.

Question 29

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) hot potato fallacy.

Question 30

Pre-commitment is:

A) a solution for dynamic inconsistency.
B) a choice that increases the number of future options.
C) a way to force "bad" choices by removing future good options.
D) All of these are true about pre-commitment.

Question 31

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 32

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) statically consistent.
C) exhibiting a present bias.
D) exhibiting a substitution bias.

Question 33

Lily wants to invest in the stock market.She notices that the share price for Great Flowers Inc.has been rising for weeks.She chooses to invest in Great Flowers Inc.because she assumes it will continue to rise purely because of the run it has been on.Lily suffers from:

A) the hot-hand fallacy.
B) the gambler's fallacy.
C) a present bias.
D) the sunk cost fallacy.

Question 34

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 are sufficient for dynamic inconsistency.

Question 35

The belief that if you paid more for something it must be more valuable to you is known as:

A) projection bias.
B) the sunk cost fallacy.
C) the hot-hand fallacy.
D) narrow framing.

Question 36

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 37

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 38

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 39

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 future states of mind into the present.
C) can lead people to overestimate their adaptability.
D) All of these are true about project bias.

Question 40

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 41

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 42

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 43

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 44

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 45

Social motives include all of the following EXCEPT:

A) altruism.
B) fairness.
C) the desire to create a favorable impression.
D) risk aversion.

Question 46

Suppose Hillary was offered the following choice: Option 1 is to win $10 for sure and Option 2 is to win $20,000 with odds of 1 in 2,000 and otherwise to win nothing.If Hillary is risk averse she:

A) will choose Option 1.
B) will choose Option 2.
C) is indifferent between the two.
D) will choose Option 1 or Option 2 with equal probability.

Question 47

Which of the following is NOT among the statements that critics of prospect theory have made about it?

A) It is not necessary, since expected utility theory accounts rather well for most risky choices.
B) The evidence reflects systematic mistakes that consumers might correct through experience and awareness.
C) Instead of explaining behavioral puzzles, prospect theory merely summarizes them.
D) Loss aversion has been proven to be false in many theoretical and experimental economic works.

Question 48

Game theory tells us that in the ultimatum game:

A) the threat to reject is credible and is expected to increase the amount given.
B) the threat to reject in not credible, and is not expected to increase the amount given.
C) the threat to reject is credible, but is not expected to increase the amount given.
D) the threat to reject in not credible, but still is expected to increase the amount given.

Question 49

Prospect theory:

A) is an alternative to expected utility theory that may resolve a number of puzzles related to risky decisions and was proposed by Daniel Kahneman and Amos Tversky.
B) gave puzzling results with respect to risky decisions and was improved by Daniel Kahneman and Amos Tversky's expected utility theory.
C) is an alternative to expected utility theory that may resolve a number of puzzles related to risky decisions and was proposed by John Nash.
D) gave puzzling results with respect to risky decisions and was improved by John Nash's expected utility theory.

Question 50

Choices made in the ultimatum game suggest:

A) that in social situations, emotions such as anger and indignation influence economic decisions.
B) that ultimatums make decision-making more optimal.
C) that individuals are not influenced by social motives.
D) that offering an ultimatum is usually a bad strategy.

Question 51

In the ultimatum game:

A) is a multi-stage game where 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 where 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.
C) is a multi-stage game where one player (the proposal) divides a fixed prize between himself and another player (the recipient) who is an passive participant.
D) is a single-stage game where one player (the proposal) divides a fixed prize between himself and another player (the recipient) who is an passive participant.

Question 52

Game theory suggests that in the trust game:

A) trustees will be untrustworthy and will forego potentially profitable investments.
B) trustees will be trustworthy and will pursue all potentially profitable investments.
C) trustees will be untrustworthy, but will pursue all potentially profitable investments.
D) trustees will be trustworthy, but will forego potentially profitable investments.

Question 53

In a voluntary contribution game:

A) each member of a group makes a contribution to a common pool which benefits only the contributor, and this leads to alignment of individual and collective interests.
B) each member of a group makes a contribution to a common pool which benefits everyone, and this leads to alignment of individual and collective interests.
C) each member of a group makes a contribution to a common pool which benefits only the contributor, and this leads to a conflict between individual and collective interests.
D) each member of a group makes a contribution to a common pool which benefits everyone, and this leads to a conflict between individual and collective interests.

Question 54

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 more sensitive, per dollar, to large losses than to small gains.
D) the consumer's valuation of an outcome is less sensitive, per dollar, to small losses than to large gains.

Question 55

The experimental results of the voluntary contribution game that contradict the predictions of game theory:

A) prove that game theory is wrong.
B) suggest very strongly that game theory is wrong.
C) could reflect incorrect assumptions about player's preferences.
D) have been refuted in subsequent economic experiments.

Question 56

Suppose Hillary was offered the following choice: Option 1 is to win $10 for sure and Option 2 is to win $20,000 with odds of 1 in 2,000 and otherwise to win nothing.If Hillary is risk loving she:

A) will choose Option 1.
B) will choose Option 2.
C) is indifferent between the two.
D) will choose Option 1 or Option 2 with equal probability.

Question 57

Prospect theory was proposed by:

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