PF 1-3 Lesson Review

What is the main concept that traditional economics relies on?

• Rational choice theory

• Cognitive bias

• Herd mentality

• Personal Finance

Which cognitive bias describes valuing something more just because you own it?

• Loss aversion

• 
  Sunk cost fallacy

• Endowment effect

• Anchoring bias

In behavioral economics, what is a heuristic?

• A financial strategy to increase savings

• A mental shortcut used for decision-making

• An investment in technology stocks

• 
  Another word for cognitive bias

Which cognitive bias is exemplified by holding onto a declining stock to avoid realizing a loss?

• Endowment effect

• Herd mentality

• Sunk cost fallacy

• Loss aversion

What is cognitive bias?

• 
  A financial strategy to maximize savings and investments.

• A theory that individuals make decisions based on their upbringing and the natural biases they have.

• A systematic deviation from rational thinking, leading to illogical judgments and decisions due to mental shortcuts and influences.

• A theory that individuals make decisions to maximize their self-interest.

What does the rational choice theory suggest about how individuals make decisions?

• They make decisions based on gut feelings and emotions.

• They make decisions through rational calculations to maximize their self-interest.

• They follow the actions and opinions of a group.

• 
  They make decisions based on mental shortcuts and cognitive biases.

What term describes the tendency to follow the actions and decisions of a group?

• Herd mentality

• Anchoring bias

• Mental accounting

• Rational choice theory

When someone decides to keep their vacation savings separate from their debt repayment funds, which cognitive bias are they demonstrating?

• Sunk cost fallacy

• Endowment effect

• Anchoring bias

• Mental accounting

How can individuals mitigate the negative influence of cognitive biases on financial decisions?

• Make decisions quickly

• Avoid setting financial goals

• Boost financial literacy

• Ignore other opinions

What does the sunk cost fallacy lead individuals to do?

• Justify further investments based on previously incurred costs

• Place undue emphasis on the first piece of information received

• 
  Value something more because they own it

• Only stick with an underperforming investment if a very large amount of money was invested.