Prospect Theory Quiz

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

• Based on certainty effect

• Based on rationality

• Based on subjective value

• Based on expected value

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?

• $20

• $15

• $10

• $5

What is loss aversion in prospect theory?

• People are more sensitive to gains than losses

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

• People are risk seeking in gains

• People are consistent in their risk preferences

What is the endowment effect in prospect theory?

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

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

• People are indifferent to ownership

• Ownership decreases subjective value

What is the sunk cost fallacy?

• Making decisions based on future potential gains

• Continuing a behavior due to previously invested resources

• Being risk seeking in all situations

• Avoiding change at all costs

What is reference dependence in prospect theory?

• Being indifferent to framing of situations

• Ignoring all biases in decision making

• Relying solely on expected value for decision making

• Being influenced by context and presentation of information

What is the survivorship bias?

• Focusing on failures rather than successes

• Concentrating on those that made it through a selection process

• Ignoring prominent information

• Being sensitive to variations in numbers

What is mental accounting in prospect theory?

• Ignoring the anchoring effect

• Considering money as fungible and interchangeable

• Evaluating complex decisions simultaneously

• Dividing assets into separate mental accounts

What is anchoring in prospect theory?

• Being completely rational in decision making

• Ignoring all external information

• Relying heavily on previously offered information when evaluating unknown values

• Adjusting decisions randomly

What is the contrast principle in prospect theory?

• Seeing things next to each other to perceive differences

• Ignoring the context of situations

• Perceiving differences between items without comparison

• Focusing on items that are less prominent