U1 Behavioral Economics

What is the most common method for allocating resources in the United States?

• Force
• First come-First serve
• Counting the number of freckles on each person’s nose
• Markets

Productive Cooperation:

• Is impossible because as long as there is scarcity people will compete for more.
• Is desirable because people can produce more when they cooperate.
• Requires that people be willing to sacrifice their own well being to make other people better off.
• Is best achieved when government takes things from people who have too much and gives those things to people who don’t have enough.

Market allocation of goods and services:

• Works the same way as government allocation of goods and services.
• Can only be achieved when producers and consumers have enough information to make good decisions.
• Only helps rich people get more at the expense of poor people.
• Requires government to protect property rights and enforce the rules of the market exchange.

The biggest advantage of allocating through markets is that it:

• Motivates people to produce more of the goods and services that people want most
• Eliminates scarcity faster than other ways of allocating.
• Makes sure everyone gets as much as they want.
• Doesn’t require any government involvement.

The government starts a program to help homeless people. Based on what you learned in this unit, what will determine if the law actually helps homeless people?

• Whether the intentions of the policy makers were genuine.
• The incentives created by the program.
• Whether the politicians are good people or not.
• None of the above, the program will fail due to unintended consequences.

Which of the following best describes the benefit and cost of allocating a good by first come-first serve?

• Benefit—people compete by producing more of the goods they want. Cost—rich people will get most of the good.
• Benefit—people like waiting in long lines because it gives them a chance to rest. Cost—rich people will not get any of the good, but neither will poor people.
• Benefit—it gives people without the opportunity to make much money working a better chance to compete successfully for the good. Cost—the competition doesn’t result in more of the goods people want being produced.
• Benefit—it is the best way to allocating those goods that aren’t scarce. Cost—people tend to get in fights when they are waiting in line for goods that aren’t scarce

Behavioral economics…

• Is a field of economics that studies people who make rational and objective decisions
• Analyzes how different economies around the world behave over time
• Tracks and examines stock market trends over a certain period of time
• Combines economics and psychology to study why people behave the way they do in the real world

Which of the following is TRUE about cognitive biases?

• It is easy to recognize when cognitive biases are influencing our own decisions
• There is rarely anything you can do to combat a cognitive bias’ influence
• There are only a handful of cognitive biases that exist
• Awareness is often the first step to overcoming the influence of a cognitive bias

Andrew wants to buy a specific model of a new car. He conducts research and finds many resources that highlight the benefits of that car model. Which cognitive bias might be influencing Andrew’s decision making?

• Confirmation Bias
• Hedonic Adaptation
• The Sunk Cost Fallacy
• Overconfidence

Mina wants to start using an investment app that all of her friends are raving about. She hasn’t done any research on the app, but she trusts her friends’ judgment. At home, Mina’s mom points out that Mina is being influenced by FOMO and herd mentality. All of the following are things Mina can do to overcome these cognitive biases EXCEPT…

• Take time to reflect and identify why she is so eager to use the app
• Watch a positive video about the app, download the app, and start using it that day
• Ask people outside her friend group for their opinions and perspectives
• Seek out reviews that talk about the disadvantages of using the app