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
According to Thaler and Sunstein's nudge theory, a 'nudge' is best characterized as:
Answer: An environmental change that predictably alters behavior while preserving choice
A nudge alters the choice architecture to steer behavior in a predictable direction without forbidding any options or significantly changing economic incentives.
The 'planning fallacy' refers to the tendency of individuals and organizations to:
Answer: Underestimate the time, costs, and risks of future actions while overestimating benefits
The planning fallacy causes systematic underestimation of project duration and cost, largely because planners focus on the best-case scenario rather than base rates from similar past projects.
In Kahneman's dual-process theory, System 1 thinking is characterized by:
Answer: Fast, automatic, intuitive, and associative processing
System 1 operates automatically and quickly with little conscious effort, relying on heuristics and associations rather than deliberate analysis.
A consumer buys a gym membership but stops going after two months, yet keeps paying because 'I already paid for it.' Which bias is primarily at work?
Answer: Sunk cost fallacy
Continuing to pay for an unused gym membership to justify past spending exemplifies the sunk cost fallacy—rational agents ignore unrecoverable past costs.
Which behavioral concept explains why people prefer a sure gain of $50 over a 50% chance of winning $100, even though the expected values are identical?
Answer: Risk aversion in the domain of gains
Risk aversion in the gains domain (captured by the concave value function of prospect theory) causes individuals to prefer certain smaller gains over probabilistically equivalent larger ones.
Social proof as a behavioral economics tool works because people:
Answer: Use others' behavior as an informational signal about the correct action
Social proof exploits informational social influence—when uncertain, people infer appropriate behavior from observing what others do, assuming others possess relevant knowledge.
Thaler's 'Save More Tomorrow' (SMarT) program combats present bias in retirement saving by:
Answer: Having employees pre-commit to increasing future contributions tied to pay raises
SMarT delays the cost of saving to the future (when present bias is less acute) and ties increases to pay raises, reducing the felt sacrifice while growing contributions over time.