Behavioural Economics 2

A consumer is faced with the following choice:

Bundle 1: £20 with certainty

Bundle 2: 50% chance of winning £15

Bundle 3: £30 with certainty

Bundle 4: A 50% chance of winning £10 or a £50% chance of winning £30

Which of the following best describes risk averse behaviour?

• A consumer who prefers bundle 3 or bundle 4

• A consumer who prefers bundle 4 to bundle 1

• A consumer who prefers bundle 1 to bundle 4

• A consumer who prefers bundle 2 to bundle 1

In a recent study, people were given the following description of a woman. "Kathryn is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations". They were then asked, which is more probable?

Kathryn is a bank clerk, or Kathryn is a bank clerk and is active in the feminist movement.

The majority of people chose option 2. The flaw in their approach is best summarised in which cognitive bias?

• Representativeness bias

• Confirmation bias

• Heuristic bias

• Availability bias

Which of the following is NOT a feature associated with the bounded rationality model of decision making?

• A search for the optimum solution to a problem

• A shortage of time and other resources to collect and process information on alternative decision outcomes

• Satisficing behaviour

• The use of heuristics in decision making

The term "bounded rationality" means

• Humans are always irrational decision makers

• We can choose between making irrational and rational decisions

• Humans are unable to exercise self-control

• Our decision-making capability is limited by our inability to process large amounts of data

One of the findings of Prospect Theory is that people value losses more than gains. Which of the following illustrates this?

• Choosing a 50% off offer over a Buy One Get One Free offer

• Selling shares in a portfolio when on a losing streak

• Keeping shares in a portfolio when on a winning streak

• Ordering too much food and overeating just because you have already paid for it

Which of the following best describes loss averse behaviour?

• A consumer who values gains disproportionately more than losses

• A consumer who values losses more than gains

• A consumer who values losses and gains equally

• A consumer who values gains more than losses

Which of the following policies would be most likely to be considered a nudge?

• The tax authorities making tax avoidance legal

• The tax authorities making tax avoidance illegal

• The tax authorities sending a letter to people to tell them their deadline is approaching, which if they miss they will be fined

• The tax authorities sending a letter to people who tax avoid telling them they are being fined

Two companies use the following slogan as part of their marketing campaign.

"Buy two - get 50% off"

"Buy one, get one free"

They realise they sell twice as much with Slogan B than Slogan A. This is an example of which of the following behavioural biases?

• Heuristics

• Framing

• Commitment device

• Loss aversion

Which of the following is NOT a heuristic associated with bounded rationality decision making?

• Availability

• Procrastination

• Anchoring

• Representativeness

In a recent study, people were given the following description of a woman. "Kathryn is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations". They were then asked, which is more probable?

Kathryn is a bank clerk, or Kathryn is a bank clerk and is active in the feminist movement.

The majority of people chose option 2. The flaw in their approach is best summarised in which cognitive bias?

• The probability of Kathryn being a bank clerk is greater than her being a bank clerk and a feminist

• The probability of Kathryn being a feminist is greater than her being a bank clerk

• The probability of Kathryn being a bank clerk and a feminist is the same as her being a bank clerk

• The probability of Kathryn being a bank clerk and a feminist is greater than her being a bank clerk