Behavioral Economics Flashcards
7 cards from real CBE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Behavioral Economics flashcards as text
Which concept describes the tendency for people to rely too heavily on the first piece of information encountered when making decisions?
Answer: Anchoring bias
Anchoring bias occurs when individuals over-weight the initial information (the anchor) when making subsequent judgments or decisions.
A company sets its product's default option as the premium tier rather than the basic tier. This strategy primarily leverages which behavioral principle?
Answer: Default effect
The default effect exploits inertia—people tend to stick with pre-selected options, so setting a premium default increases uptake.
In behavioral economics, 'mental accounting' most directly explains why consumers:
Answer: Treat money differently depending on its source or intended use
Mental accounting refers to the cognitive tendency to assign money to separate psychological 'accounts' based on origin or purpose, leading to non-fungible treatment of money.
Which of the following best illustrates the 'endowment effect'?
Answer: A seller valuing an owned coffee mug higher than a buyer is willing to pay
The endowment effect is the tendency to assign higher value to objects simply because one owns them, causing a gap between willingness to accept and willingness to pay.
The concept of 'time inconsistency' in behavioral economics best describes:
Answer: Preferences that reverse as the time horizon for a decision changes
Time inconsistency (or dynamic inconsistency) occurs when preferences between delayed outcomes reverse as those outcomes become more imminent, often modeled with hyperbolic discounting.
Prospect theory, developed by Kahneman and Tversky, differs from expected utility theory primarily because it:
Answer: Evaluates outcomes relative to a reference point with asymmetric value for gains and losses
Prospect theory uses a value function defined over gains and losses relative to a reference point, with losses weighted more heavily than equivalent gains (loss aversion).
Which behavioral phenomenon explains why employees are more likely to enroll in a retirement savings plan when enrollment is automatic rather than voluntary?
Answer: Default/inertia effect
Automatic enrollment exploits the default/inertia effect: people tend not to deviate from pre-set defaults, so auto-enrollment dramatically raises participation rates.