4.1.2.4 Behavioural economics and economic policy notes

What does the concept of "bounded rationality" suggest about human decision-making?

• Humans can process unlimited information and make the optimal decision.

• Humans are perfectly rational and always maximize their utility.

• Humans are limited in their cognitive processing, leading to satisficing rather than optimizing.

• Humans always make decisions that are completely random.

Which of the following best describes "bounded self-control"?

• The ability to have unlimited self-control in any situation.

• The tendency to exhibit self-control only in familiar environments.

• The limited capacity to exert self-control, influenced by external factors.

• The complete lack of self-control in decision-making processes.

What is an example of a decision-making bias known as "anchoring"?

• Deciding based on the potential outcomes rather than the initial information.

• The influence of a specific reference point or 'anchor' on subsequent judgments.

• Ignoring relevant information and focusing only on the most recent events.

• Being overly influenced by what others think or do.

How does the "availability heuristic" bias occur in decision making?

• By making decisions based on the information that is most easily retrievable from memory.

• By using strict rules to guide every decision without considering exceptions.

• By always consulting others before making a decision.

• By basing decisions on the least available information to avoid common opinions.

What role do social norms play in decision-making biases?

• They have no significant impact on decisions.

• They provide a logical framework for making unbiased decisions.

• They influence decisions by setting expectations on what is typical or appropriate behavior.

• They only affect decisions in professional settings.

Why is altruism considered important in economic and social contexts?

• It is only relevant in religious contexts.

• It promotes self-centered behaviors which boost economic productivity.

• It fosters cooperation and trust, which are essential for societal well-being.

• It has no real impact but is a good moral practice.

How does the perception of fairness affect economic transactions?

• It leads to higher prices and reduced sales.

• It has no effect on transactions as people are primarily self-interested.

• It can increase trust and cooperation, leading to more sustainable business relationships.

• It only affects the luxury goods market.

What is a "rule of thumb" in the context of decision-making biases?

• A legal rule that must be followed in all decision-making processes.

• A precise calculation used to ensure decisions are optimal.

• A simple, practical approach to decision-making that is not necessarily optimal.

• A rule used only in thumb wrestling.

Which scenario exemplifies the use of the anchoring bias?

• A person always shops at the same store because it's closest to their home.

• A negotiator sets a high initial offer, which influences the final agreement price.

• A decision is made after consulting with many different people.

• A person decides based on a coin flip.

In what way does bounded rationality complicate economic models that assume rational decision-making?

• It does not complicate models since all individuals are rational.

• It introduces variability and unpredictability into models due to human cognitive limits.

• It simplifies models by reducing the number of factors to consider.

• It only affects models on a theoretical level and has no practical implications.