Prospect Theory Quiz

According to prospect theory, how do people make economic choices?

• Based on expected value

• Based on certainty effect

• Based on subjective value

• Based on rationality

What is the expected value of a lottery ticket that costs $20 with a probability of winning of 0.5% and a prize of $2000?

• $5

• $15

• $10

• $20

What is loss aversion in prospect theory?

• People are consistent in their risk preferences

• People are risk seeking in gains

• People are more motivated to avoid loss than to acquire a similar gain

• People are more sensitive to gains than losses

What is the endowment effect in prospect theory?

• People attribute more value to things based on their market price

• People attribute more value to things they don't own

• People attribute less value to things they own

• People attribute more value to things merely because they own them

What is the sunk cost fallacy?

• Continuing a behavior due to previously invested resources

• Making decisions based on future potential gains

• Avoiding change at all costs

• Being risk seeking in all situations

What is reference dependence in prospect theory?

• Focusing only on absolute states of wealth

• Ignoring the emotional impact of losses

• Relying on expected value for decision making

• Being influenced by context and presentation of information

What is anchoring in prospect theory?

• Ignoring all external factors in decision making

• Relying on previously offered information when evaluating unknown values

• Being completely rational in all choices

• Making decisions based on current emotions

What is the survivorship bias?

• Being sensitive to variations in numbers

• Focusing on failures rather than successes

• Concentrating on those that made it through a selection process

• Ignoring prominent information

What is mental accounting in prospect theory?

• Ignoring the emotional impact of losses

• Evaluating complex decisions all at once

• Considering money as interchangeable and label-free

• Dividing assets into separate mental accounts

What is the contrast principle in prospect theory?

• Being completely rational in all choices

• Ignoring the emotional impact of losses

• Perceiving differences between items based on their proximity

• Failing to perceive differences between items