Financial Literacy Test 1 Review

Sunk costs are those that _________

• have already been made

• you can still do something about

• should factor heavily into your decisions going forward

• are the most important of all costs

When Mr. Fenton was researching the decision to go to law school, he paid a disproportionate amount of attention to sources that emphasized the potential benefits of law school and much less attention to sources discussing the potential downsides. Which cognitive bias was Mr. Fenton guilty of?

• loss aversion

• confirmation bias

• sunk cost fallacy

• hedonic adaptation

• herd mentality

You spend an entire Saturday searching for an apartment to move into. You spend hours looking at different apartments, but there are none that you really like that fit your budget. Which of the following is a sunk cost that you should NOT consider when deciding whether or not to sign an apartment lease that day?

• the monthly rent

• the application fee

• the security deposit

• the money you spent on gas driving around that day

Overconfidence bias may lead the majority of doctors to think that they are ________.

• above average doctors

• average doctors

• below average doctors

• extremely poor doctors

Due to the hedonic adaptation, what do you expect would happen to Valentina's level of happiness after buying a new Louis Vuitton handbag?

• It would initially increase, then return to a baseline level

• It would remain at a baseline level, then increase over time

• It would initially decrease, then return to a baseline level

• It would remain at a baseline level, then decrease over time

Herd mentality may explain why ________

• Carla chose to skip a night out with her friends and stay home to read a book instead

• Federico went to see a horror movie with his buddies even though he hates horror movies

• Rolando decided to keep his current iPhone even though his closest friends bought the latest version

• Jasmine wore a really unique hairstyle to school

Reginald won a $10 million lottery and then immediately lost all of the money betting on the Texans. If Reginald is prone to loss aversion, after which event would he have experienced a stronger emotional response?

• Winning the lottery

• Losing the bet

• His emotional reaction would be equally strong after both events

Which of the following is NOT an example of confirmation bias?

• Interpreting information to support your existing beliefs

• Seeking out sources that challenge your prior beliefs

• Only remembering details that uphold your beliefs

• Ignoring information that contradicts your beliefs

• Seeking out sources that support your beliefs

Because of the endowment effect, people tend to _______

• believe that other people's belongings are more valuable than theirs

• overpay for items that they have never owned before

• place a higher value on something just because they own it

• underestimate the market value of their own belongings

Liza kept eating her Chipotle carnitas burrito even though she was extremely full because she wanted to "get her money's worth." Liza has succumbed to ________.

• FOMO

• the sunk cost fallacy

• confirmation bias

• herd mentality

• the endowment effect