1.3 Behavioral Economics

What does behavioral economics offer?

• A simple perspective

• A nuanced perspective

• A limited perspective

• A traditional perspective

What can cognitive biases lead to?

• Illogical judgments

• Perfect decisions

• Accurate predictions

• Flawless reasoning

What is a cognitive bias?

• A mental shortcut that leads to efficient decision-making

• A logical reasoning process

• A method to improve memory

• A type of emotional intelligence

What is the sunk cost fallacy?

• A cognitive bias where past investments justify further investments

• A strategy to maximize future profits

• A method to calculate investment returns

• A way to reduce financial losses

What should financial goals focus on?

• Short-term desires

• Long-term achievements

• Immediate spending

• Quick profits

What does Economics study?

• The discomfort of losing value.

• The production, distribution, and consumption of goods and services.

• The mimicry of group actions and opinions.

• The justification of further investments.

Which of the following scenarios best illustrates the endowment effect?

• A shopper is drawn to buy a product because it is marked "50% off."

• A homeowner values their property at a higher price than buyers are willing to pay because they feel it has sentimental value.

• A person refuses to sell a stock even though it is underperforming, believing it will rebound.

• A group of friends all decide to buy the same phone because it’s trending on social media.

What is an example of anchoring bias in decision-making?

• A shopper assumes the second-highest priced item is of better quality because it is not the cheapest.

• A person sticks to their original decision to avoid wasting time, even after receiving new information.

• A car buyer focuses on the first price mentioned during negotiations, even if other factors suggest the car is worth less.

• A company spends money on a failed project because they've already invested heavily in it.

Which situation demonstrates the sunk cost fallacy?

• A student continues attending a class they dislike because they’ve already paid the tuition.

• A customer buys a product because it’s heavily discounted, even though they don’t need it.

• A manager relies on an outdated strategy because it worked in the past.

• An investor diversifies their portfolio to minimize risks.

What is an example of mental accounting?

• A person keeps spending small amounts on coffee daily but refuses to buy an expensive espresso machine because it's a "big" expense.

• An employee quits their job because their coworkers are all leaving the company.

• A gambler keeps betting because they are convinced the next game will cover their losses.

• A student sells their old textbook for less than they initially paid for it.