Behavioral Economics

the tendency people have to be more confident in their own abilities, such as driving, teaching, or spelling, than is objectively reasonable

• Overconfidence Bias

•   The Bandwagon Effect

• Confirmation Bias

• Loss Aversion

A website tells you, "Only one left!" while shopping online. Which loss aversion strategy is this website using?

• Coupons

• Scarcity and urgency

• Buy now, get free shipping

• Free trials and samples

Which of the following best describes what a cognitive bias is?

• A rational decision that is based on research and facts

• The belief that a person should change their opinions when new facts arise

• The belief that we are right until someone provides information that contradicts our belief

• An error in the way we think that can influence our decisions 

Answer explanation

Cognitive bias is a general term that means not always thinking rationally. Even despite facts, we may still choose the wrong thing. Examples are sunk cost fallacy, the endowment effect, herd mentality, etc.

the feelings of anxiety that arise from the belief that you may be missing out on rewarding experiences that others are having

• The Bandwagon Effect

• Herd Mentality

• The Endowment Effect

• Fear of Missing Out (FOMO)

refers to an emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value

• Confirmation Bias

• Endowment Effect

• Fear of Missing Out (FOMO)

• Loss Aversion

Answer explanation

the tendency to process information by looking for, or interpreting, information that is consistent with one’s existing beliefs

• Loss Aversion

• Mental Accounting

• Overconfidence Bias

• Confirmation Bias

Answer explanation

Confirmation bias can cause us to make mistakes with money. No matter the facts, we still choose to believe what we want.

the phenomenon where a real or potential loss is perceived by individuals as psychologically or emotionally more severe than an equivalent gain

• Mental Accounting

• Bandwagon Effect

• Loss Aversion

• Confirmation Bias

the phenomenon where a person is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when it is clear that abandonment would be more beneficial

• Endowment Effect

• Sunk Cost Fallacy

• Confirmation Bias

• Bandwagon Effect

Answer explanation

Sometimes it's good to know when to quit or start over. Nothing you do now is going to bring back to money or time already spent

After learning about hedonic adaptation, Tina wants to spend her money in waya that will make her truly more happy. Which of the following might help her do so? 

• Purchasing a dress after seeing an ad on social media

• Buying a new laptop even though her current one still works well

• Donating money to a charity that supports a cause she cares about

• Getting a new phone accessory for her phone case

Answer explanation

Remember studies concerning the "hedonic adaptation" show that giving money away and spending on experiences like vacations, ballgames, etc versus "things" help create happiness.

separating money into imaginary categories in your mind

• Transaction Utility

• Mental Accounting

• Sunk Cost Fallacy

• Confirmation Bias

Answer explanation

Some people separate their money in their heads. This was "gift" money so I get to splurge or that money was supposed to be for new clothes so I can't spend it on my car.