Behavioral Economics Quiz

What is the term for when people make decisions based on emotions rather than logic?

• Opportunity cost

• Emotional bias

• Compound interest

• Budgeting

Answer explanation

The term 'emotional bias' refers to the tendency of individuals to make decisions based on their emotions rather than logical reasoning. This can lead to irrational choices, making it the correct answer.

What is the concept of putting off a smaller reward now for a larger reward later?

• Delayed gratification

• Opportunity cost

• Impulse buying

• Marginal cost

Answer explanation

The concept of delaying immediate satisfaction for a greater reward in the future is known as delayed gratification. It emphasizes self-control and the ability to prioritize long-term benefits over short-term pleasures.

What is a common cognitive bias that leads people to avoid losses more than they seek gains?

• Loss aversion

• Anchoring

• Sunk cost fallacy

• Default effect

Answer explanation

Loss aversion is a cognitive bias where individuals prefer to avoid losses rather than acquiring equivalent gains. This means people are more impacted by the fear of losing something than by the potential to gain something of equal value.

Why do stores often offer 'buy one, get one free' deals?

• To increase brand loyalty

• To leverage the scarcity principle

• To appeal to loss aversion

• To influence decision-making through framing

Answer explanation

Stores use 'buy one, get one free' deals to frame the offer as a gain, making customers feel they are getting more value. This influences decision-making by highlighting the perceived benefit, encouraging purchases.

What is the main purpose of a checking account?

• To grow your money over time

• To pay bills and manage daily expenses

• To invest in stocks and bonds

• To earn interest on deposits

Answer explanation

The main purpose of a checking account is to pay bills and manage daily expenses. It provides easy access to funds for transactions, unlike savings accounts which focus on growing money over time.

What is a Certificate of Deposit (CD)?

• A type of credit card

• A savings account with a fixed term and interest rate

Answer explanation

A Certificate of Deposit (CD) is a type of savings account that requires you to deposit money for a fixed term, during which it earns a fixed interest rate. This distinguishes it from credit cards, making the second option correct.

What is the typical fee for overdrawing a checking account?

• No fee

• A percentage of the overdrawn amount

• A fixed fee, often $25–$35

• It depends on the bank

Answer explanation

The typical fee for overdrawing a checking account is a fixed fee, often ranging from $25 to $35. This is a common practice among banks to cover the costs associated with processing the overdraft.

How can you avoid paying monthly fees on a checking account?

• Deposit cash weekly

• Use the account only for online purchases

• Maintain a minimum balance

• Only withdraw cash at ATMs

Answer explanation

To avoid monthly fees on a checking account, maintaining a minimum balance is often required by banks. This ensures you meet the account's terms and can help you avoid fees, unlike the other options listed.

What is diversification?

• Investing in a single stock

• Spreading investments across multiple asset types

• Buying and holding real estate

• Selling stocks regularly

Answer explanation

Diversification means spreading investments across multiple asset types to reduce risk. Investing in a single stock or selling stocks regularly does not achieve this, while buying real estate is just one type of investment.

What does the term “risk tolerance” mean in investing?

• The ability to lose all your money

• Your willingness to take financial risks

• The interest earned on savings accounts

• The chance of earning a profit

Answer explanation

Risk tolerance refers to your willingness to take financial risks when investing. It reflects how much uncertainty and potential loss you can accept in pursuit of higher returns, making 'Your willingness to take financial risks' the correct choice.