Theme 1 Task 14

"Decision making is made by consumers on the basis of their experiences, the time they have to make a decision and the limits of their cognitive abilities, rather than rational behaviour". Which of the following options is the best definition for the above statement

• Heuristic

• Bounded Rationality

• Framing effect

"The way in which a choice is phrased affects the consumer’s decision.". Which of the following options is the best definition for the above statement

• Heuristic

• Bounded Rationality

• Framing effect

"Decision making is made on the basis of approximations rather than logic i.e. rules of thumb.". Which of the following options is the best definition for the above statement

• Heuristic

• Bounded Rationality

• Framing effect

Behavioural economics studies the interaction between individual choices and individuals’ psychological tendencies when making decisions.

• True

• False

Which of the following is the best definition of behavioural ‘heuristics’?

• The use of limited information to arrive at more complex solutions

• A systematic, rational mode of thinking

• Cognitive shortcuts or ‘rules of thumb’ that simplify decisions

• The use of cognitive biases

If a consumer buys a lottery ticket but also purchases fire insurance, then he or she can be said to be:

• Risk neutral in losses and gains

• Risk loving in gains and losses

• Risk averse in losses, risk loving in gains

• Risk loving in losses, risk averse in gains

A person is said to exhibit bounded rationality if

• They always make the best decision, independent of the number of options available

• They are only able to assess some of the possibilities that could occur in any given scenario

• They are able to assess all possibilities optimally in any given scenario

• There are no bounds to their cognitive processing abilities

Gamble 1

(i) A certain win of £100, versus

(ii) A 10% chance to win £1000 and a 90% chance to win nothing

Gamble 2

(iii) A certain loss of £900, versus

(iv) A 90% chance to lose £1000 and a 10% chance to lose nothing

When choosing between the Gamble 1 options, a greater proportion of people will opt for the riskless alternative (i), while for Gamble 2 options, people are more likely to choose the riskier (iv). This is an example of:

• Status quo bias

• Herding

• Anchoring

• Framing

From your understanding of behavioural economics, which of the following sets of words best describe the ‘System 2’ mode of thinking?

• Uncontrolled, effortless, slow, conscious

• Controlled, effortful, slow, conscious

• Uncontrolled, effortless, fast, unconscious

• Controlled, effortless, slow, unconscious

“Our hamburgers are now 75% lean” is equivalent to “our hamburgers are now 25% fat”. But people have different perceptions related to these two expressions. Which following effect explains this phenomenon?

• Herd behaviour

• The framing effect

• Loss aversion

• Status quo bias

• Bounded rationality