Deck 7: Departures From Standard Rational Choice Models With and Without Regret

Question 1

According to the Kahneman-Tversky value function,

A)small gains should be subtracted from large losses.
B)small gains should be combined with large gains.
C)small losses should be segregated from large losses.
D)small gains should be segregated from large losses.

Answer 1

D

Question 2

Say one morning you are considering whether to take a taxi cab or riding the train to work. Both mediums would cost you about $4, but you have already paid in advance for the train (since you pay a flat fee at the beginning of the month). If the cab ride would take slightly less time than the train ride, and you are mostly concerned with the time it takes you to get to work, you should:

A)take the train since you already paid for it.
B)take the cab.
C)be indifferent between either modes of transportation.
D)find another way to get to work.

Answer 2

B

Question 3

Suppose you and your friend have decided to go into a very lucrative joint venture together, which would make $5,000 for both of you. Nevertheless your friend, who does not need the money as much as you, say he will not cooperate with you unless he gets at least 90% of the earnings. It will be in your advantage not to capitulate to your friend's demands as long as:

A)you follow a self-interest goal.
B)you cared only about the absolute distribution of the winnings.
C)you do not follow an egoistic goal.
D)your friend does not know anything about your goals.

Answer 3

C

Question 4

The Kahneman-Tversky value function is

A)risk-averse in gains, risk-seeking in losses.
B)risk-seeking in gains, risk-averse in losses.
C)risk-averse in gains and losses.
D)risk-neutral in gains and losses.

Question 5

In this chapter we are told that people's tastes not only can differ but must differ. This is because

A)genetic programming makes it impossible for people to have the same preferences.
B)people with differing tastes can profitably invade any population of similar tastes.
C)homogeneous populations become complacent and lose their vigilant qualities.
D)no two persons could have the same preferences.

Question 6

If you were to behave according to the rational choice model when confronted with a loss of $25 on the same day in which you receive an unexpected gift of $25 you would

A)value the loss of $25 more heavily than the gift of $25.
B)discount the loss and value the gain so that you feel you have gained welfare.
C)see the two events as exactly offsetting and thereby of no consequence in your overall welfare.
D)value the gift of $25 more than the loss of $25.

Question 7

The Kahneman-Tversky value function shows that a gain of $100

A)is valued less than two gains of $50.
B)would be offset in one's mind by a loss of less than $100.
C)would be offset in one's mind by a loss of more than $100.
D)would be offset by a gain of $100.

Question 8

Based on the present-aim standard a person who drinks gasoline and subsequently dies could be consider rational as long as:

A)her behavior helps other people.
B)she really likes the taste of gasoline and death.
C)she thinks her behavior will result in more gasoline for other people.
D)her death is not painful.

Question 9

The story in the text about playing tennis outside even though you paid for an inside court illustrates which of the following?

A)Psychologically, people often do not treat sunk cost as irrelevant to a decision.
B)Rational choice analysis is what comes naturally to most people.
C)People will make efficient decisions without knowing what they are doing.
D)All of these are implied by the tennis court story.

Question 10

The "self-interest theory" considers an act to be rational if

A)it is an efficient pursuit of whatever aims one has at the moment of deliberation and action.
B)it conforms to generally accepted views of justice and also serves one's interests.
C)it efficiently promotes the ongoing material interest of the person who performs it without the requirement that social justice be achieved.
D)the act was done while the person was sane and coherent.

Question 11

If the receiver in the "ultimate bargaining game" cares not just about his final wealth level but also about fairness,

A)the allocator will make a one-sided offer.
B)the receiver will accept a one-sided offer.
C)the receiver will reject a one-sided proposal.
D)the receiver will always receive the full $20.

Question 12

The Kahneman-Tversky value function is

A)a symmetrical utility function for gains and losses.
B)steeper in losses than in gains.
C)steeper in gains than in losses.
D)not defined over changes in income or wealth.

Question 13

Say Anna's utility function was given by UA = (MA)(MM), where MA is Anna's wealth and MM is Marie's wealth. Initially, Anna has 160 units of wealth and Marie has 40. When Anna maximizes her utility level is equal to

A)5,000.
B)100.
C)10,000.
D)200.

Question 14

Kahneman and Tversky are correct about "mental accounts," household budgeting

A)should help families cut back on spending.
B)leads families to spend more than if they did not budget.
C)should have no effect on spending.
D)will encourage families to earn more money than they would if they did not budget.

Question 15

The Kahneman-Tversky value function provides a rationale for

A)putting several Christmas gifts in one big box for your special friend.
B)paying cash rather than using a credit card.
C)requiring employees to take all their vacation days in two weeks rather than taking scattered days throughout the year.
D)car dealers offering rebates rather than a price reduction on a car.

Question 16

The self-interest model predicts that the outcome of the "ultimatum bargaining game" in which the allocator starts with $20 is that

A)the allocator will offer the receiver $10 and keep $10 for himself.
B)the allocator will offer the receiver $0.01 and will propose to keep $19.99 for himself.
C)the receiver will always reject the allocator's proposal.
D)the allocator will always keep the full $20.

Question 17

If you care not only about your own income level but also about your relatives' income level, with increasing concern for them as they get poorer, then your indifference curves (defined over your income level and that of your relatives)

A)will be negatively sloped, and concave from above.
B)will be positively sloped, and concave from the origin.
C)will be negatively sloped and linear.
D)cannot be specified until more information is provided.

Question 18

If Kahneman and Tversky are correct, I should

A)buy individual stocks rather than put my money into a mutual fund.
B)put my money in a mutual fund instead of individual stocks.
C)be indifferent which type of investment I make.
D)have opposite strategies depending on whether my investments will rise or fall.

Question 19

According to the rational choice model which of these two events should be valued more by rational consumers: 1: gift of mug valued at $10, 2: finding the mug you thought was lost, which cost you $10 to purchase.

A)Both events should have the same value.
B)Event A
C)Event B
D)There is really no way to rationally decide.

Question 20

Say Anna's utility function was given by UA = (MA)(MM), where MA is Anna's wealth and MM is Marie's wealth. Initially, Anna has 160 units of wealth and Marie has 40. In order to maximize her utility Anna should

A)transfer all her wealth to Marie.
B)transfer 60 units to Marie.
C)keep all her wealth for herself.
D)get 40 units from Marie.

Question 21

According to the text, one important economic application of the anchoring and adjustment bias is

A)to estimate production costs of simple operations.
B)to evaluate consumer behavior with regard to luxury spending.
C)to increase productivity in volunteer organizations.
D)in estimating the failure rates of complex projects.

Question 22

A fundamental axiom of rational choice theory is

A)choices should be independent of relevant alternatives.
B)choices should be independent of irrelevant alternatives.
C)consumers should be risk-neutral.
D)consumers should disregard recent performance data.

Question 23

In an earlier chapter we learned that a risk neutral person would be indifferent to a gamble that involved a coin flip with a $1,000 win if heads and a $1,000 loss if tails. In this chapter that conclusion is qualified. What changes does this chapter introduce that make the earlier conclusion altered?

Question 24

In this chapter, virtue can lead to material gain and therefore it can be an important part of the social order. Evaluate this view of virtue or moral behavior. Is material gain a sufficient motive for morality? Is moral behavior based on more than the possibility for personal gain?

Question 25

Suppose you have an option that gives you a lifetime income of $75,000 or a graduated income that begins at $30,000 and ends at $120,000 with the exact same present value. Which of the following would be true?

A)Based on purely rational choice assumptions you should prefer the first choice.
B)The first choice is preferred because no one likes low income years.
C)The second choice is generally preferred because the steadily improving income brings some pleasure.
D)There is no reason to believe either choice is preferred so you would be indifferent between the two options.

Question 26

One person out of every 1000 is an economist and 90% of them are math oriented. If only 5% of the population is math oriented and you pick a person at random who happens to be math oriented, it is

A)likely that the person chosen is an economist rather than an non-economist.
B)likely that the person chosen is not an economist rather than an economist.
C)almost certain the person will be an economist.
D)almost impossible the person will be an economist.

Question 27

You are struggling to pick a major and find psychology and economics equally attractive but you cannot make up your mind. Then your parents suggest that, given your SAT scores you might want to consider mathematics. Before long you have no problem settling in on economics as your choice. This is an example of

A)anchoring and adjusting.
B)availability.
C)the halo effect.
D)bounded rationality.

Question 28

Which of the following is true?

A)People prefer the toll ways where they throw in some change every dozen miles or so to a toll road that has one payment at the end of the trip.
B)Budgeting your income will often result in less total spending.
C)High prices and rebates on cars simply irritate the consumer and make him feel treated like a fool.
D)People tend to enjoy the process of buying a car more when the process involves difficult choices.

Question 29

According to the textbook, an efficient manager will be one who:

A)does not put much weight on recent performance.
B)considers recent performance as the best indicator of an applicant's ability.
C)tends to favor early applicants in an employee search.
D)weighs a candidate's weaknesses more heavily than the candidate's strengths.

Question 30

According to the text, the procedure of "anchoring and adjustment:"

A)often leads to biased estimates.
B)usually leads to correct estimates without rational calculations.
C)describes people who are dogmatic in their views but change when new data comes.
D)explains why people tend to succeed at new business ventures.

Question 31

Which of the following would not be classified as a mechanism of self-control?

A)Leaving a credit card at home when you walk in the mall with friends.
B)Having an alarm system installed in your home.
C)An overweight person joining a weight-watchers group.
D)An alcoholic campaigning for higher liquor taxes.

Question 32

Weber and Fechner found

A)that it is easier to tell the difference between a 25 and a 50-watt light bulb than it is to tell the difference between a 100-watt bulb and a 300-watt bulb.
B)that the minimally perceptible difference is roughly proportional to the original intensity of the stimulus.
C)that the minimally perceptible difference is inversely proportional to the original intensity of the stimulus.
D)consumers are more likely to drive 10 blocks to save $5 on a $500 television than they are to drive 10 blocks to save $5 on a $25 clock.

Question 33

Say you are at the bar trying to decide which drink to buy. The waiter informs you they have two drinks available: red wine and stout beers. Since you like red wine much more than beer, you decide to order wine. Nevertheless, as you prepare to inform the waiter your decision he tells you that they also have Pale Ale beers, and you happened to like stouts much more than pale ales. If we take into consideration the halo effect you are probably going to order

A)the red wine.
B)the stout.
C)the pale ale.
D)a completely different drink.

Question 34

Some sports writers seem so sure that rookies of the year and MVPs will not repeat the following year. They could be relying on which of the following to make that judgment

A)bounded rationality.
B)psychophysics of perception.
C)hedonic framing.
D)regression effect.

Question 35

When people are in financial difficulty an advisor will usually recommend establishing a budget for spending. One reason is that a budget will act to discipline behavior if people psychologically are subject to

A)bounded rationality.
B)mental accounts.
C)segregated gains.
D)the halo effect.

Question 36

There was a recent report that burglaries occur much more frequently in homes that are not as well kept as homes that have attractive landscaping and a more lavish appearance. This may seem odd because the value of the contents of the better homes would be worth far more to thieves. If a robber knows that the owners of one of each type of house is gone for the weekend, why would a rational robber break into the less lavish home?

Question 37

Curt pays a $200 annual fee at a fitness center rather than paying the $2 charge that it would cost if he paid by the visit. He intends to go 100 times in the year. He claims that the fee will act as a commitment device to help him follow his wish to exercise regularly and the per visit fee would not act as a commitment device. His friend tells him that the cost is $100 either way so his reasoning is false. Do you agree that the annual fee can act as a commitment device for Curt and the per visit fee would not? Explain your answer. Assume a zero interest rate so the timing of payments is not effected by foregone interest.

Question 38

You are ill on the day of the concert for which you had bought tickets almost a month ago. Since you paid almost $40 for the tickets, you are considering whether to go to the concert anyway. Rational choice theory says that you should go to the concert only if:

A)the benefits of going outweigh the $40 dollars you spent on the tickets.
B)the benefits of going outweigh the $40 dollars plus any additional pains associated with getting out of bed while being sick.
C)the benefits of going outweigh any pains associated with getting out of bed while being sick.
D)you feel better.

Question 39

Many people favor stronger gun control as a method of reducing murder rates. Others argue that criminals will get guns despite stronger laws restricting them. Assume those seeking gun control recognize this argument but they still push for gun control. They most likely believe that

A)people are rational but are subject to the self control pitfall in moments of high passion.
B)murders are usually premeditated rational acts based on cost-benefit analysis.
C)criminals fall prey to the Weber-Fechner law.
D)the sophomore jinx does not apply to murderers.

Question 40

According to Kahneman and Tversky's value function, which of the following gifts provide higher total values:

A)4 different gains of $25 each
B)2 different gains of $50 each
C)1 gain of $100 each
D)All provide exactly the same value