1.2 and 1.3 Personal Financial literacy

1. Behavioral economics…

• 1. Is a field of economics that studies people who make rational and objective decisions

• 1. Analyzes how different economies around the world behave over time

• 1. Tracks and examines stock market trends over a certain period of time

• 1. Combines economics and psychology to study why people behave the way they do in the real world

2. Cognitive bias is…

• 1. An error in the way we think that can influence our decisions

• 1. The desire to seek out information that confirms our existing beliefs

• 1. The belief that our abilities are better than they actually are

• 1. The concept of placing more value on an item when we own it

3. You go to a restaurant and order a big meal. Even though you’re full, you keep eating because it was expensive. This is an example of...

• 1. Mental Accounting

• 1. The Sunk Cost Fallacy

• 1. Fear of Missing Out

• The Endowment Effect

Which of the following is TRUE about cognitive biases?

• It is easy to recognize when cognitive biases are influencing our own decisions

• 1. There is rarely anything you can do to combat a cognitive bias’ influence

• 1. There are only a handful of cognitive biases that exist

• 1. 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? 

• 1. Confirmation Bias

• 1. Hedonic Adaptation

• 1. The Sunk Cost Fallacy

• 1. Overconfidence 

3. 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…

• 1. Take time to reflect and identify why she is so eager to use the app

• 1. Watch a positive video about the app, download the app, and start using it that day

• 1. Ask people outside her friend group for their opinions and perspectives

• 1. Seek out reviews that talk about the disadvantages of using the app

You have two choices:
A) Get a guaranteed $50,
B) Take a 50/50 chance to win $100 or get nothing.
Most people choose A, even though the math is the same. What bias does this show?

• Overconfidence

• Confirmation Bias

• Loss Aversion

• FOMO

You bought a T-shirt for $10. Now someone offers you $20 for it, but you refuse to sell it even though you don’t wear it. What cognitive bias is influencing you?

• Endowment Effect

• Herd Mentality

• Sunk Cost Fallacy

• Hedonic Adaptation

You bought a $15 movie ticket. Halfway through, you’re bored and want to leave, but stay because you paid for it. What’s this an example of?

• FOMO

• Sunk Cost Fallacy

• Loss Aversion

• Overconfidence

You see all your friends investing in a trendy new app, so you invest too—without researching it yourself. What bias is at play?

• Overconfidence

• Herd Mentality

• Confirmation Bias

• Loss Aversion