Deck 10: An Introduction to Behavioral Economics

Question 1

When researchers compare people who are asked to imagine that, having previously purchased a ticket for $10, they arrive at the theater to discover they have lost their ticket to people who are asked to imagine that they arrive just before the performance to buy a ticket and find they have lost $10 from their wallets, which group is more likely to say that they would still attend the performance?

A)The lost ticket group
B)The lost $10 group
C)Both groups are equally likely to say they would attend the performance.
D)Both groups report that they would no longer go to the performance.

Answer 1

The lost $10 group

Question 2

In traditional economic models, which of the following does NOT describe homo economicus:

A)impulsive.
B)narrowly self-interested.
C)well-informed.
D)cognitively sophisticated.

Answer 2

impulsive.

Question 3

When Tversky and Khaneman asked one group of people to imagine that, having previously purchased a ticket for $10, they arrive at the theater to discover they have lost their ticket and a second group of to imagine that they arrive just before the performance to buy a ticket and find they have lost $10 from their wallets, the majority of people in the lost ticket group said they ________ still attend the performance, and the majority of people in the lost $10 group said they ________ still attend the performance.

A)would; would not
B)would; would
C)would not; would not
D)would not; would

Answer 3

would not; would

Question 4

________ is the property of an entity whose individual units are interchangeable.

A)Representativeness
B)Availability
C)Progressivity
D)Fungibility

Question 5

Fungibility is the property of an entity whose individual units:

A)are less valuable when used together.
B)are nearly impossible to identify.
C)are interchangeable.
D)each serve a unique purpose.

Question 6

According to the availability heuristic, the more easily we can recall examples of an event:

A)the less likely we judge the event to be.
B)the more likely we judge the event to be.
C)the more we like the event.
D)the less we like the event.

Question 7

According to the availability heuristic, we often estimate the frequency of an event by:

A)using available data from either the government or other organizations.
B)how much we enjoyed the event.
C)the degree to which the event resembles stereotypical members of a category.
D)the ease with which we can recall relevant examples.

Question 8

In traditional economic models, homo economicus refers to a decision maker who:

A)is narrowly self-interested, well-informed, highly disciplined, and cognitively capable enough to solve optimization problems.
B)searches for relevant facts in a potentially haphazard way and who quits once his or her understanding has reached a certain threshold.
C)makes frequent departures from rational choice and instead relies upon judgmental heuristics, or rules of thumb, to guide decisions.
D)lacks impulse control and, as a result, may experience regret.

Question 9

Homo economicus is all of the following EXCEPT:

A)highly disciplined.
B)narrowly self-interested.
C)well-informed.
D)cognitively naive.

Question 10

If an entity is fungible, then its individual units are:

A)of value for a short period of time.
B)nearly impossible to purchase.
C)useless without the other units.
D)interchangeable.

Question 11

The rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory is the:

A)adjustment heuristic.
B)anchoring heuristic.
C)representative heuristic.
D)availability heuristic.

Question 12

In traditional economic models, the narrowly self-interested, well-informed, highly disciplined and cognitively formidable decision maker is often referred to as:

A)a boundedly rational agent.
B)a behavioral economist.
C)homo economicus.
D)a satisficer.

Question 13

Satisficing is the decision-making strategy that:

A)aims for adequate results when achieving optimal results may necessitate an excessive expenditure of resources.
B)aims for optimal results in situations where the decision maker has perfect information.
C)attempts to minimize the harm from losses rather than maximize the pleasure from gains.
D)focuses on how one's consumption compares to the consumption of others, rather than on absolute consumption.

Question 14

The ________ is a rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory.

A)Weber-Fechner law
B)adaptive rationality standard
C)availability heuristic
D)representative heuristic

Question 15

Rules of thumb that reduce computation costs are known as:

A)optimality constraints.
B)decision trees.
C)cost-benefit calculations.
D)judgmental and decision heuristics.

Question 16

Suppose one group of people is asked to imagine that, having previously purchased a ticket for $10, they arrive at the theater to discover they have lost their ticket, and a second group of people is asked to imagine that they arrive just before the performance to buy a ticket and find they have lost $10 from their wallets. According to the rational choice model, which group should be more likely to say they would still attend the performance?

A)The lost ticket group
B)The lost $10 group
C)Both groups should be equally likely to say they would attend.
D)Neither group should be interested in attending the performance.

Question 17

In traditional economic models, homo economicus is assumed to be all of the following EXCEPT:

A)highly disciplined.
B)altruistic.
C)well-informed.
D)cognitively sophisticated.

Question 18

When Tversky and Khaneman asked one group of people to imagine that, having previously purchased a ticket for $10, they arrive at the theater to discover they have lost their ticket and a second group to imagine that they arrive just before the performance to buy a ticket and find they have lost $10 from their wallets, they found that people in the lost ticket group were more likely to say they would ________ the performance, even though the rational choice model predicts that people in ________.

A)still attend; the lost $10 group should be more likely to say they would still attend
B)still attend; both groups should be equally likely to say they would still attend
C)no longer attend; the lost $10 group should be more likely to say they would no longer attend
D)no longer attend; both groups should be equally likely to say they would still attend

Question 19

Judgmental and decision heuristics are:

A)a way of calculating computation costs.
B)derived from the rational choice model but imply higher computation costs.
C)rules of thumb that reduce computation costs.
D)used to test the rational choice model when computation costs are small.

Question 20

The decision-making strategy that aims for adequate results because optimal results may necessitate excessive expenditure of resources is known as:

A)the present-aim standard of rationality.
B)satisficing.
C)loss aversion.
D)the adaptive rationality standard.

Question 21

According to the representative heuristic, people will tend to think that Karen is a vegetarian if:

A)they themselves are vegetarians.
B)if the fraction of vegetarians in the population is increasing.
C)they have just read a book about vegetarians.
D)Karen has many of the characteristics of a stereotypical vegetarian.

Question 22

Suppose that 90 percent of women who are Krista's age do not have high cholesterol and 10 percent do. If a cholesterol test indicates that Krista has high cholesterol, but the test is only accurate 80 percent of the time, then the probability that Krista really does have high cholesterol is roughly:

A)90 percent.
B)80 percent.
C)31 percent.
D)18 percent.

Question 23

According to the representative heuristic, you are more likely to assume that someone you just met is an architect if:

A)you recently watched a television show about architects.
B)that person has many of the characteristics of an architect.
C)you also happened to meet two other architects earlier in the day.
D)it has been a long time since you last met an architect.

Question 24

Suppose Christina just saw an advertisement on television for an antidepressant, but it has been a long time since James saw one. According to the availability heuristic:

A)Christina is likely to think that depression is more common than James.
B)James is likely to think that depression is more common than Christina.
C)Christina and James are likely to think that depression is equally common.
D)Christina and James are equally likely to think that people recover from depression.

Question 25

According to the ________, if Carla has many of the characteristics of a stereotypical basketball player (for example, she is tall), then people will be more likely to assume she plays basketball.

A)adaptive rationality standard
B)representative heuristic
C)availability heuristic
D)Weber-Fechner law

Question 26

The ________ is the rule of thumb according to which people's belief about the likelihood that something belongs to a given category increases with the extent to which it shares characteristics with the stereotypical members of that category.

A)representative heuristic
B)adaptive rationality standard
C)availability heuristic
D)Weber-Fechner law

Question 27

Suppose Paul just saw a car accident while driving home from work. According to the availability heuristic, this is likely to make Paul think that:

A)people only get into car accidents if they are bad drivers.
B)he is extremely lucky.
C)car accidents are rare.
D)car accidents are more common than they really are.

Question 28

If Doug has just watched a television show in which the main character is killed in an airplane crash, then the availability heuristic predicts that he will:

A)more accurately assess the pros and cons of air travel.
B)never watch that television show again.
C)overestimate the dangers of air travel.
D)underestimate the dangers of air travel.

Question 29

Suppose that only 2 percent of all people are geniuses. If an IQ test indicates that Albert is a genius, but the test is only accurate 90 percent of the time, then the probability that Albert really is a genius is roughly:

A)18 percent.
B)2 percent.
C)10 percent.
D)16 percent

Question 30

According to the representative heuristic, people will be more likely to assume that Wendy is a lawyer if:

A)they plan to apply to law school at some point in the future.
B)there are few other lawyers living in the same geographic region.
C)Wendy vehemently denies being a lawyer.
D)Wendy has many of the characteristics of a stereotypical lawyer.

Question 31

The phenomenon that unusual events are likely to be followed by more nearly normal is known as:

A)the adaptive rationality standard.
B)regression to the mean.
C)anchoring and adjustment.
D)fungibility.

Question 32

According to the availability heuristic, which of the following will make Katie more likely believe that she will win a lot of money if she buys a lottery ticket?

A)Her boss hinting that she will soon receive a raise at work
B)The fact that it has been several years since she purchased a lottery ticket
C)Watching a news report about someone winning 2 million dollars playing the lottery
D)The fact that is has been several years since anyone has won the lottery

Question 33

Suppose Anna just received a parking ticket. According to the availability heuristic, this will tend to make Anna:

A)think people frequently receive parking tickets.
B)think people should not receive parking tickets.
C)dislike parking tickets.
D)less likely to pay future parking tickets.

Question 34

According to the representative heuristic, people are more likely to believe that something belongs to a given category if:

A)people believe that they themselves are members of the category.
B)people can recall other members of the category.
C)it shares characteristics with the stereotypical members of that category.
D)it is unlike the stereotypical members of that category.

Question 35

Suppose that John has many of the same characteristics as the stereotypical mathematician. According to the representative heuristic, this will tend to make people think that:

A)John is good at math.
B)John is bad at math.
C)many people are good at math.
D)many people are bad at math.

Question 36

The rule of thumb according to which people are more likely to assume something belongs to a given category if it shares many characteristics with the stereotypical members of that category is the:

A)adjustment heuristic.
B)representative heuristic.
C)anchoring heuristic.
D)availability heuristic.

Question 37

________ is the phenomenon that unusual events are likely to be followed by more nearly normal ones.

A)The present aim standard of rationality
B)Loss aversion
C)Anchoring and adjustment
D)Regression to the mean

Question 38

Suppose Bobby just watched a documentary about the massive decline in house prices during the Great Recession. According to the availability heuristic, this is likely to make Bobby:

A)believe that he is wealthier than other people.
B)think the movie is biased towards the status quo.
C)believe that house prices will be more stable in the future.
D)worry that the price of his own house might fall.

Question 39

According to the representative heuristic, people's belief about the likelihood that something belongs to a given category ________ the extent to which it shares characteristics with the stereotypical members of that category.

A)will only rarely be influenced by
B)is unaffected by
C)decreases with
D)increases with

Question 40

According to the representative heuristic, if Roger has many of the characteristics of a millionaire, then people will:

A)be less likely to think that he is a millionaire.
B)be more likely to think that he is a millionaire.
C)want to have those same characteristics.
D)think that many people are millionaires.

Question 41

Consider two coupons: one offers 10 percent off a pair of jeans that costs $100, and the other offers 50 percent off a pair of sunglasses that costs $20. Using either coupon requires driving to the shopping mall across town. According to the Weber-Fechner law, which coupon will people tend to perceive as being more valuable?

A)The coupon for the jeans since $100 is greater than $20.
B)The coupon for the sunglasses since 50 percent is greater than 10 percent.
C)They will be seen as equally valuable since both lead to a savings of $10.
D)Neither coupon will be of value to anyone since both require driving across town.

Question 42

According to the Weber-Fechner law, when the change in a stimulus is small in proportion to the original stimulus, the perceived size of the change will be:

A)large.
B)small.
C)greater than one.
D)impossible to determine.

Question 43

The Weber-Fechner law is the relationship according to which the perceived change in any stimulus:

A)depends upon an initial approximation, which is then updated in accordance with additional information.
B)depends upon the ease with which it is possible to summon similar changes from memory.
C)varies according to the size of the change measured as a proportion of the original stimulus.
D)varies depending upon whether the change triggers loss aversion.

Question 44

When people use anchoring and adjustment to estimate something, the adjustment they make when they receive new information is typically:

A)in the wrong direction.
B)highly accurate.
C)too large.
D)too small.

Question 45

Typically, when people use anchoring and adjustment to estimate something, the importance of ________ in influencing their assessment is too large.

A)the anchor
B)the adjustment
C)both the anchor and the adjustment
D)neither the anchor nor the adjustment

Question 46

According to the Weber-Fechner law, the perceived size of a change in a stimulus will be large when the change in the stimulus:

A)is a rare event.
B)occurs frequently.
C)is small in proportion to the original stimulus.
D)is large in proportion to the original stimulus.

Question 47

Suppose Evan and Robert are each filling out a separate survey about parking on campus. On Evan's survey, the first question asks about whether he thinks the fine for parking illegally on campus should be $50, and on Robert's survey the first question asks about whether he thinks the fine should be $100. For both Evan and Robert, the second question asks how much each thinks the fine currently is. If Evan and Robert know nothing about the parking fines on campus, but each uses anchoring and adjustment to form his assessment, then, all else equal, you would expect:

A)Evan's estimate of the current fine to be higher than Robert's.
B)both of them to guess a number between $50 and $100.
C)their estimates to be identical.
D)Robert's estimate of the current fine to be higher than Evan's.

Question 48

Consider two coupons: one offers 50 percent off a scarf that costs $20, and the other offers 5 percent off a jacket that costs $200. Using either coupon requires driving to the shopping mall across town. According to the Weber-Fechner law, which coupon will people tend to perceive as being more valuable?

A)The coupon for the scarf since 50 percent is greater than 5 percent.
B)The coupon for the jacket since $200 is greater than $20.
C)They will be seen as equally valuable since both lead to a savings of $10.
D)Neither coupon will be of value to anyone since both require driving across town.

Question 49

Suppose Danielle receives the highest grade in the class on the first exam in her economics course. Regression to the mean implies that Danielle:

A)isn't likely to do as well on the second exam.
B)is likely to do even better on the second exam.
C)is likely to get an A in the class.
D)is unlikely to forget the material she studied for the exam.

Question 50

According to the Weber-Fechner law, when the change in a stimulus is large in proportion to the original stimulus, the perceived size of the change will be:

A)large.
B)small.
C)zero.
D)impossible to determine.

Question 51

________ is an estimation technique that begins with an initial approximation, which is then modified in accordance with additional information.

A)The adaptive rationality standard
B)Status quo bias
C)Regression to the mean
D)Anchoring and adjustment

Question 52

Regression to the mean refers to the phenomenon in which unusual events are:

A)likely to be followed by events that are more normal.
B)unlikely to ever occur in the first place.
C)likely to be followed by events that are even more unusual.
D)occurring on a regular basis.

Question 53

Eric brews beer for a hobby. He has noticed that whenever he brews an unusually bad batch of beer, his next batch is much better. One explanation for this is that Eric learns from his past mistakes. Another explanation is:

A)status quo bias.
B)regression to the mean.
C)loss aversion.
D)the representative heuristic.

Question 54

According to the Weber-Fechner law, the perceived change in any stimulus:

A)does not depend on the size of the change in proportion to the original stimulus.
B)is larger when the change is large in proportion to the original stimulus.
C)is larger when the change is small in proportion to the original stimulus.
D)is zero regardless of the size of the original stimulus.

Question 55

The relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus is known as:

A)status quo bias.
B)the representative heuristic.
C)the Weber-Fechner law.
D)regression to the mean.

Question 56

An estimation technique that begins with an initial approximation, which is then modified in accordance with additional information, is known as:

A)status quo bias.
B)regression to the mean.
C)anchoring and adjustment.
D)the representative heuristic.

Question 57

Suppose Chelsea reads two news articles about future house prices. The first article predicts that house prices will fall next month, and the second predicts that house prices will rise next month. Valerie reads the same two articles, but she first reads the one that predicts that house prices will rise, and then reads the one that predicts that house prices will fall. If Chelsea and Valerie know very little about future house prices, and each uses anchoring and adjustment to form her assessment, then, all else equal, which of them is more likely to think that house prices will rise next month?

A)Chelsea
B)Valerie
C)They are both equally likely to think that house prices will rise
D)They will both think that house prices will stay the same

Question 58

________ is the relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus.

A)The adaptive rationality standard
B)The Weber-Fechner law
C)The representative heuristic
D)Regression to the mean

Question 59

Suppose Stephen's first novel makes the New York Times bestseller list. Regression to the mean implies that his second novel:

A)will have a similar plot to his first model.
B)will be even more popular than his first novel.
C)won't be as popular as his first novel.
D)will be a complete flop.

Question 60

Last week, Gina's bakery sold fewer cupcakes than ever before. Regression to the mean implies that the bakery:

A)has probably had other bad weeks, but Gina can't remember them.
B)will sell more cupcakes this week.
C)is likely to go out of business.
D)should stop selling cupcakes.

Question 61

Suppose Vincent is willing to pay $350 to buy a new bike. Loss aversion implies that if Vincent had just bought the bike, you would:

A)have to pay him less than $350 to part with it.
B)have to pay him more than $350 to part with it.
C)have to pay him exactly $350 to part with it.
D)not be able to get him to part with it for any amount of money.

Question 62

Loss aversion is the tendency to:

A)weigh losses more heavily than gains.
B)weigh gains more heavily than losses.
C)enjoy gains, but dislike losses.
D)dislike gains, but enjoy losses.

Question 63

In situations where people make decisions with perfectly predictable consequences, traditional economic models cannot explain:

A)why people experience regret.
B)how people maximize their utility.
C)how risk aversion influences decisions.
D)what the rational choice should be.

Question 64

Suppose Alyssa is willing to drive across town to save 50 percent on a soccer ball with a list price of $40. If Alyssa is rational, this implies that she should:

A)not be willing to drive across town to save 50 percent on a skateboard with a list price of $100.
B)be willing to drive across town to save 50 percent on a book with a list price of $20.
C)be willing to drive across town to save 5 percent on a bike with a list price of $400.
D)not be willing to drive across town to save $20 on a shirt with a list price of $60.

Question 65

Suppose Michael is willing to drive across town to save 40 percent on a sweatshirt with a list price of $80. If Michael is rational, this implies that he should

A)not be willing to drive across town to save 40 percent on a microwave with a list price of $200.
B)be willing to drive across town to save 40 percent on a book with a list price of $30.
C)be willing to drive across town to save 10 percent on a guitar with a list price of $320.
D)not be willing to drive across town to save $35 on a shirt with a list price of $70.

Question 66

Kendra is having difficulty deciding between two cars, A and B. As shown in the accompanying diagram, A has more cargo room than B, but lower gas mileage. Ideally Kendra would like a car both with a lot of cargo room and good gas mileage.  
 If Kendra behaves like most decision-makers, then the addition of option C would:

A)decrease her likelihood of buying a car.
B)have no impact on her choice of A and B.
C)increase her likelihood of picking A.
D)increase her likelihood of picking B.

Question 67

Brandon is having difficulty deciding between two jobs, X and Y. As shown in the accompanying diagram, X entails a greater risk of injury than Y, but pays more. Ideally, Brandon would like a job that both pays well and does not entail a high risk of injury.  
If Brandon behaves like most decision-makers, then the addition of option Z would:

A)decrease his likelihood of accepting any job.
B)increase his likelihood of picking Y.
C)have no impact on his choice of X and Y.
D)increase his likelihood of picking X.

Question 68

Suppose Whitney is willing to pay $200 to buy a new phone. Loss aversion implies that if Whitney already had just bought the phone, you would:

A)have to pay her less than $200 to part with it.
B)have to pay her more than $200 to part with it.
C)have to pay her exactly $200 to part with it.
D)not be able to get her to part with it for any amount of money.

Question 69

Natasha is having difficulty deciding between two jobs, A and B. As shown in the accompanying diagram, A is closer to home than B, but doesn't pay as well. Ideally, Natasha would like a job that both pays well and is close to her home. If Natasha behaves like most decision-makers, then the addition of option C would:

A)decrease her likelihood of accepting any job.
B)have no impact on her choice of A and B.
C)increase her likelihood of picking A.
D)increase her likelihood of picking B.

Question 70

Suppose you would have to pay Troy at least $12 to get him to part with his new water bottle. Loss aversion implies that if Troy had not yet purchased the water bottle, he would:

A)be willing to pay more than $12 to buy it.
B)be willing to pay exactly $12 to buy it.
C)be willing to pay less than $12 to buy it.
D)no longer be interested in buying it.

Question 71

________ is the tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude:

A)The availability heuristic
B)Fungibility
C)The present-aim standard of rationality
D)Loss aversion

Question 72

Loss aversion is the tendency to experience losses as:

A)just as painful as the pleasures that result from gains of the same magnitude.
B)more painful than the pleasures that result from gains of the same magnitude.
C)less painful than the pleasures that result from gains of the same magnitude.
D)more painful than gains of any magnitude.

Question 73

Suppose you would have to pay Alicia at least $150 to get her to part with a ticket she just bought to see her favorite band play next Friday. Loss aversion implies that if Alicia had not yet bought the ticket, she would:

A)be willing to pay more than $150 for it.
B)be willing to pay less than $150 for it.
C)be willing to pay exactly $150 for it.
D)no longer be interested in purchasing it.

Question 74

Evidence suggests that as the importance of what's at stake grows, loss aversion:

A)is reversed.
B)becomes much less pronounced.
C)becomes even more pronounced.
D)does not change.

Question 75

Traditional economic models ________ the fact that people sometimes regret making decisions with perfectly predictable consequences.

A)account for
B)can easily explain
C)cannot explain
D)are supported by

Question 76

Studies have shown that when people are asked to imagine a hypothetical illness, the amount of money they say they would be willing to pay to avoid getting the illness is ________ they would be willing to pay for a cure if they were already sick.

A)unrelated to the amount
B)the same as
C)more than
D)less than

Question 77

The tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude is known as:

A)the availability heuristic.
B)loss aversion.
C)the present-aim standard of rationality.
D)regression to the mean.

Question 78

Corey is having difficulty deciding between two dishwashers, A and B. As shown in the accompanying diagram, A makes more noise than B, but is cheaper. Ideally, Corey would like a dishwasher that is both quiet and inexpensive. If Corey behaves like most decision-makers, then the addition of option C would:

A)decrease his likelihood of buying a dishwasher.
B)have no impact on his choice of A and B.
C)increase his likelihood of picking A.
D)increase his likelihood of picking B.

Question 79

Impulse control problems can arise when people:

A)discount the future too little.
B)discount the future too heavily.
C)place too much weight on future costs and benefits.
D)place too little weight on current costs and benefits.

Question 80

The fact that people sometimes regret having made a decision with perfectly predictable consequences:

A)suggests that people like to be unhappy.
B)is a natural prediction of many traditional economic models.
C)cannot be explained by traditional economic models.
D)is a core assumption upon which traditional economic models are built.