Economics 10 Q4 - Behavioral economics

Behavioral Economics challenges the assumption that individuals are always:

• Influenced by emotions

• Rational decision-makers

• Influenced by social norms

• Swayed by external incentives

Answer explanation

Explanation: Traditional economics assumes that individuals act rationally, maximizing utility. Behavioral economics, however, demonstrates that people often make irrational decisions due to biases, emotions, and heuristics.

In behavioral economics, a "rule of thumb" is best described as:

• A mathematical formula for making decisions

• A type of legal guideline for economic behavior

• A mental shortcut or simple decision-making strategy for default choices

• A statistical model for risk management

Answer explanation

Explanation: A "rule of thumb" is a heuristic used to simplify decision-making by relying on practical, easily applied principles rather than detailed analysis.

The "availability bias" leads individuals to:

• Trust recent information more than older information

• Make decisions based on information that is easiest to recall

• Favor unfamiliar options over familiar ones

• Consider all available options equally

Answer explanation

Explanation: Availability bias occurs when people overestimate the likelihood of events that are more memorable or recent, even if they aren’t the most relevant or likely.

The "anchoring effect" is when:

• People base decisions on the first piece of information they receive

• Individuals are influenced by others in group settings

• Choices are made solely on emotional responses

• Decision-making is free from biases

Answer explanation

Explanation: The anchoring effect occurs when individuals rely too heavily on an initial piece of information (the "anchor") when making decisions, which can skew their final judgment.

Loss aversion means that people:

• Prefer gains over avoiding losses

• Are indifferent between gains and losses

• Feel the pain of a loss more intensely than the pleasure of a similar gain

• Will always avoid risky decisions

Answer explanation

Explanation: Loss aversion suggests that people experience losses more strongly than gains, making them more motivated to avoid losses than to achieve gains.

"Framing" in behavioral economics refers to:

• How a decision is structured and presented, influencing the choice

• The process of analyzing options logically

• The way people ignore context in decision-making

• Avoiding biases by choosing objectively

Answer explanation

Explanation: Framing effects show that the way information is presented (positive or negative) can significantly influence people's decisions, even if the choices are essentially the same.

Bounded self-control refers to a person’s:

• Ability to ignore social influences on behavior

• Inability to act in their long-term best interest due to lack of self-control

• Capacity to make perfect, rational choices

• Willingness to take risks to maximize utility

Answer explanation

Explanation: Bounded self-control implies that individuals may struggle to make decisions that align with their long-term interests due to impulses or temptations.

Imperfect information in behavioral economics suggests that:

• People have access to all information they need

• People make perfect decisions with the information they have

• Decisions are based on limited or inaccurate information

• People ignore information when making decisions

Answer explanation

Explanation: Imperfect information means individuals often make choices without all necessary data, leading to potentially suboptimal decisions.

Rational choice theory assumes that people:

• Make decisions that maximize their utility based on available information

• Act randomly without regard for consequences

• Always choose options that benefit others over themselves

• Ignore costs and benefits when making decisions

Answer explanation

Explanation: Rational choice theory is based on the assumption that individuals make decisions that maximize personal utility, weighing costs and benefits rationally.

Which of the following is an example of a "cognitive bias"?

• Logical reasoning in decision-making

• Ignoring emotions in judgment

• Confirmation bias, where people favor information that confirms existing beliefs

• A well-balanced view on all perspectives

Answer explanation

Explanation: Confirmation bias is a cognitive bias where individuals seek out information that supports their preexisting beliefs, ignoring contradictory evidence. This can lead to poor decision-making and reinforce existing biases.