Question 1

People are sometimes seen to give up money to move to a fairer allocation.What experiment could be used to determine if this is because people truly care about fairness or because people want to avoid the consequences of others' spite?

Accepted Answer

The Dictator Game isolates the decision of one player, removing the strategic element of avoiding spite, thus revealing if the decision is motivated by fairness.

Question 2

Consider a version of the ultimatum game in which player 1 makes an integer offer {1,2 …,9} to player 2.If player 2 accepts,he or she gets that amount of money and 1 gets to keep the remainder of $10.If 2 rejects,both get nothing.Which of the following is an offer that arises in a subgame-perfect equilibrium assuming players only care about monetary payoffs?

Accepted Answer

A

Question 3

When psychologists refer to the "Paradox of Choice",what do they mean?

Accepted Answer

The "Paradox of Choice" refers to the phenomenon where having too many options can actually lead to less satisfaction with one's decision or even avoidance of making a decision altogether. This is because having so many options can increase feelings of anxiety, regret, and the fear of missing out on a better alternative. Therefore, choice A is the best answer.

Question 4

People are sometimes seen to give up money to make an allocation more fair.What experiment could be used to determine if this is because people truly care about fairness or because people want to avoid the consequences of others' spite?

Accepted Answer

The answer of People are sometimes seen to give up...

Question 5

What are the main differences between neoclassical economics and behavioral economics?

Accepted Answer

The main difference between neoclassical economics and behavioral economics is that behavioral economics takes into account human behavior and psychology, whereas neoclassical economics assumes that decision makers are rational and fully informed. Neoclassical economics is mainly theoretical, while behavioral economics uses empirical evidence to understand human decision-making. Therefore, choice B is the correct answer as it differentiates the two approaches accurately.

Question 6

Return to the case of Jan,the hyperbolic discounter from the previous question.What values of B and C will lead her to be consistent with a plan not to undertake the action?

Accepted Answer

If B is less than C, then the present value of the action is less than the present value of not taking the action, consistent with Jan's plan not to undertake the action.

Question 7

The option-value principle can be roughly stated as "more choices can't make a person worse off." Are there any exceptions to this rule? Choose all that apply.

Accepted Answer

C

Question 8

An economist encounters some unexpected behavior in a market or laboratory setting.How can he or she distinguish between behavior resulting from mistakes by decision makers as opposed to being decisions based on unusual preferences?

Accepted Answer

Both options A and B provide evidence that can help distinguish between mistakes and unusual preferences. If the behavior is repeated even after opportunities to learn are provided, it suggests that it may be based on an unusual preference rather than a mistake. Additionally, if the behavior is more common among inexperienced individuals, it is also more likely to be a mistake. Therefore the most appropriate answer is C, which combines both options. Option D is incorrect because while it might be difficult to distinguish between the two empirically, it is not impossible.

Question 9

Which of the following weights on utility (over four periods starting with the current one)provide an illustration of hyperbolic discounting that could well lead to inconsistent choices over time?

Accepted Answer

Hyperbolic discounting is a phenomenon where people tend to place higher weight on immediate rewards compared to future rewards. The weights in option C show a decreasing trend, but not as steep as in option A or B. This suggests that the person is still valuing future rewards to some extent, but not as much as the immediate reward. It is possible that this could lead to inconsistent choices over time, as the person may make impulsive decisions that prioritize immediate gratification over long-term goals. Option D, where all weights are equal, does not illustrate hyperbolic discounting.

Question 10

An individual has preferences consistent with prospect theory.The person takes their current wealth of $10,000 (plus any certain additions)as their reference point.Gains above this reference point are worth +1 util.Losses below this reference point are worth -2 utils.The person is faced with two choice problems.The first involves a choice between (A)no gamble and (B)a gamble with an equal chance of winning $1,800 and losing $1,000.The second choice problem,the person first has $1,000 taken away (resulting in the adjustment of the reference point).The choice is then between (C)being given back $1,000 for sure and (D)an equal chance of winning $2,800 or nothing.What choices would the person make?

Accepted Answer

The answer of An individual has preferences consistent with prospect...

Question 11

The government is considering a mandatory savings program that forces people to save 8% of their income each year for retirement.What behavioral biases might be used as a justification for such a program? (Choose all that apply.)

Accepted Answer

B

Question 12

An individual has preferences consistent with standard expected utility theory.They have utility function U(x)over wealth x.Starting with initial wealth of $10,000,the person is then faced with two choice problems.The first involves a choice between (A)no gamble and (B)a gamble with an equal chance of winning $1,800 and losing $1,000.The second choice problem,the person first has $1,000 taken away (resulting in the adjustment of the reference point).The choice is then between (C)being given back $1,000 for sure and (D)an equal chance of winning $2,800 or nothing.What can be said about the choices the person would make?

Accepted Answer

BThe choices a person makes under standard expected utility theory depend on their utility function and the expected utility of each option. Without specific details about the utility function, we can't predict the exact choices. However, we can analyze the consistency of choices based on expected utility principles. Choice A (no gamble) and Choice D (an equal chance of winning $2,800 or nothing) involve different levels of risk and expected outcomes, especially after adjusting the reference point by taking away $1,000. If a person is risk-averse, they might prefer the certainty of Choice A initially but could be inclined towards the gamble in Choice D after losing $1,000, seeking to recover more significantly. This inconsistency can arise due to the change in the reference point and the perceived value of the gamble relative to the new reference point. Choice B (never choosing both A and C) is correct because if a person chooses A (no gamble) initially, it indicates a preference for certainty or a lower risk tolerance. After losing $1,000, choosing C (being given back $1,000 for sure) aligns with this preference for certainty, making it consistent with expected utility theory. Choosing A initially and then C does not inherently involve a contradiction in preferences based on the information given.

Question 13

Which of the following would make a player more inclined to continue into later stages of the Centipede Game rather than ending the game immediately? (Choose all that apply.)

Accepted Answer

C
D

Question 14

Jan is a hyperbolic discounter.She puts weight 1 on utility earned in the current period but only weight .5 on utility earned in future periods.In period 1 she comes up with a plan,which involves taking some action that leads to a loss of C utils in period 2 but provides a benefit of B utils in period 3.What values of B and C will lead her to behave inconsistently and not follow through on her plans?

Accepted Answer

For Jan to behave inconsistently and not follow through on her plans, the perceived utility of the action in period 1 must be positive, but negative in period 2. In period 1, she values the future utility at a discount, so the net utility she anticipates is -0.5C (the cost in period 2 discounted) + 0.25B (the benefit in period 3 further discounted). For her to initially plan to take the action, this sum must be positive, implying 0.25B > 0.5C, or B > 2C. However, in period 2, when the cost is immediate, she no longer discounts it, but she still discounts the future benefit, so her valuation is -C + 0.5B. For her to abandon her plan, this sum must be negative, implying 0.5B < C, or B < 2C. Combining these, for inconsistency, B must be greater than 2C to make the plan initially but less than 2C to abandon it, which is a contradiction. The correct interpretation is that for inconsistency, the benefit must be perceived as worth less in the immediate next period but worth pursuing when looking two periods ahead. Thus, the correct condition is C < B < 2C, where she initially sees the action as beneficial but re-evaluates it as not worth the immediate cost when the time comes to act.

Question 15

Consider the same ultimatum game as in the previous question but consider some new preferences reflecting a desire for fairness.In particular,now assume players get 1 util per dollar earned but lose 1/4 util for the absolute difference between their monetary payoffs.Which of the following is an offer that arises in a subgame-perfect equilibrium with these new preferences?

Accepted Answer

With the new preferences, players value fairness and are penalized for disparities in payoffs. An offer of 2 ensures a fairer distribution, minimizing the utility loss from the absolute difference in payoffs, and is likely to be accepted, making it a subgame-perfect equilibrium.

Question 16

Consider the same ultimatum game as in the previous questions but consider yet new preferences reflecting envy.In particular,now assume players get 1 util per dollar earned.That is all for the player who earns at least as much as the other.The player who earns strictly less than the other loses 1 util for each dollar difference.Which of the following is an offer that arises in a subgame-perfect equilibrium with these preferences?

Accepted Answer

In this case, the proposer wants to maximize their own payoff while also ensuring that the responder does not reject the offer. The responder, on the other hand, wants to minimize the difference in payoffs between themselves and the proposer.

If the proposer offers 1, then the responder will earn 1 util and the proposer will earn 0 utils. However, if the proposer offers 2, then the responder will earn 2 utils and the proposer will earn 2 utils. This means that the proposer will be better off offering 2.

If the proposer offers 4, then the responder will earn 3 utils and the proposer will earn 4 utils. This is better for the proposer than offering 2, but the proposer still risks the possibility of the responder rejecting the offer in favor of punishing the proposer. Thus, the proposer may be willing to risk offering 4 in a subgame-perfect equilibrium.

If the proposer offers 5, then the responder will earn 4 utils and the proposer will earn 5 utils. This is better for the proposer than offering 4, but the proposer still risks the possibility of the responder rejecting the offer in favor of punishing the proposer. Thus, the proposer may be willing to risk offering 5 in a subgame-perfect equilibrium.

Therefore, the subgame-perfect equilibrium offers are 4 or 5.

Question 17

Return to the case of Jan,the hyperbolic discounter from the previous question.What values of B and C will lead her to be consistent with a plan to undertake the action?

Accepted Answer

The answer of Return to the case of Jan,the hyperbolic...

Question 18

Which is not a factor that makes cognitive mistakes more likely?

Accepted Answer

Repetition is not a factor that makes cognitive mistakes more likely. In fact, repetition can improve cognitive performance by reinforcing memory and automating certain tasks. Uncertainty, time pressure, and a large number of choices are all factors that can increase the likelihood of cognitive mistakes.

Question 19

Limits to self-interested payoff maximization that have been studied by behavioral economists include

Accepted Answer

Behavioral economists have studied all of the above as potential limits to self-interested payoff maximization. Limited cognitive ability can lead to suboptimal decision-making, limited willpower can lead to self-control problems, and there may be limits to self-interest in terms of concerns for fairness and other-regarding behavior.

Question 20

In what way does prospect theory differ from the standard theory of expected utility?

Accepted Answer

Prospect theory differs from the standard theory of expected utility because it incorporates the idea of reference points, meaning that preferences can vary based on an individual's initial wealth level. This can result in people being more risk averse over gains and more risk seeking over losses compared to what would be predicted by the standard theory.

Quiz 17: Behavioral Economics