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Quizzes > Quizzes for Business > Finance

Behavioral Economics Knowledge Test Quiz

Sharpen Your Behavioral Economics Skills Today

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art depicting elements related to a quiz on Behavioral Economics Knowledge Test.

This behavioral economics quiz helps you see how biases shape choices through 15 quick multiple-choice questions. Use it to practice before class or an exam, spot gaps, and get instant feedback. For more practice, try the basic economics quiz or aim higher with the behavioral assessment certification quiz .

Which statement best describes the concept of loss aversion?
People only focus on gains in prospect evaluations.
People ignore losses when making decisions.
People prefer gains and losses equally.
People feel losses more intensely than equivalent gains.
Loss aversion refers to individuals experiencing the pain of losses more strongly than the pleasure of equivalent gains. This means that the disutility of losing is greater than the utility of gaining the same amount.
Which scenario illustrates the anchoring effect?
A car buyer sees a sticker price of $30,000 and negotiates down to $28,000, basing expectations on the original price.
An investor diversifies to minimize risk.
A smartphone user always keeps the factory settings.
A person overestimates plane crash risks after hearing about a recent accident.
Anchoring occurs when individuals rely too heavily on the first piece of information (the anchor) when making decisions. In this example, the sticker price sets an anchor that influences subsequent negotiations.
How does the framing effect influence decision making?
People estimate probabilities based on vivid examples.
People change choices based on whether options are described as gains or losses.
People avoid trying new products when options are framed negatively.
People stick with default choices regardless of framing.
The framing effect occurs when people respond differently to the same information depending on its presentation as gains or losses. This highlights that context and wording can systematically alter preferences.
When estimating the likelihood of events, the availability heuristic leads individuals to...
Base judgments on vivid or easily recalled examples.
Rely primarily on statistical base rates.
Always overestimate small probabilities.
Anchor on the first piece of information they receive.
The availability heuristic causes people to assess probability based on how easily examples come to mind. This can lead to overestimating the frequency of dramatic or memorable events.
What is a default nudge in behavioral economics?
A preselected option that applies if no alternative is chosen.
A financial penalty for poor choices.
A guarantee of positive outcomes.
A complex set of rules to enforce behavior.
A default nudge makes a specific choice the standard option, influencing behavior by taking advantage of inertia. Since many individuals stick with preselected options, defaults can significantly shift outcomes without restricting freedom.
Individuals exhibit the sunk cost fallacy when they...
Continue an endeavor because of prior investments, despite negative returns.
Ignore past expenses in decision making.
Choose options based on similarity to prototypes.
Prefer future gains over immediate rewards.
The sunk cost fallacy arises when people factor irrecoverable past costs into current decisions, leading them to persist in unprofitable activities. Rational decision making should consider only future costs and benefits.
According to prospect theory, the value function is characterized by being...
Steeper for gains than for losses.
Concave for gains, convex for losses, and steeper for losses than gains.
Convex for gains and concave for losses.
Linear throughout gains and losses.
Prospect theory's value function exhibits diminishing sensitivity: it is concave over gains and convex over losses. Moreover, loss aversion makes it steeper for losses than for equivalent gains.
The representativeness heuristic leads people to...
Judge probabilities by how similar an event is to a prototype.
Stick with default options.
Use initial information as a reference point.
Overweigh vivid memories.
The representativeness heuristic involves evaluating the likelihood of an event based on how closely it matches a typical case. This can result in neglecting relevant statistical information like base rates.
Which example best illustrates the endowment effect?
An investor diversifies to avoid losses.
A consumer tries new products without hesitation.
A buyer negotiates based on market averages.
A person insists on a higher selling price for a coffee mug they own than they would pay to buy it.
The endowment effect describes how ownership increases the perceived value of an item. Owners demand a higher price to give up a good than they would be willing to pay to acquire it.
Confirmation bias occurs when individuals...
Rely on random outcomes.
Avoid making any decision under uncertainty.
Overestimate the importance of initial information.
Seek or interpret information that confirms existing beliefs.
Confirmation bias leads people to favor information that aligns with their preconceptions and ignore contradictory evidence. This biases judgment and can reinforce erroneous beliefs.
Which nudge is most effective at increasing retirement savings participation?
Automatically enrolling employees with the option to opt out.
Providing detailed enrollment forms.
Offering financial literacy workshops.
Sending reminder emails monthly.
Automatic enrollment leverages inertia by making saving the default choice, substantially boosting participation rates. While education and reminders help, defaults have the strongest impact on behavior.
Choice overload refers to the phenomenon where…
Too many options lead to decision paralysis and lower satisfaction.
Complex choices always improve outcomes.
Limited choices reduce engagement.
Removing options increases cognitive load.
When individuals face an excessive number of options, they can experience anxiety and indecision, reducing the likelihood of making a choice. Moreover, satisfaction with the chosen option often decreases due to regret or second-guessing.
Hyperbolic discounting describes a tendency to…
Discount future rewards at a constant exponential rate.
Ignore temporal distance in decision making.
Prefer smaller-sooner rewards over larger-later ones in the short term.
Always choose the largest reward regardless of timing.
Hyperbolic discounting means that individuals disproportionately prefer immediate rewards over future ones, with discount rates declining over longer delays. This leads to time-inconsistent choices.
Status quo bias leads people to…
Constantly seek novel options.
Ignore default settings.
Evaluate choices solely on expected utility.
Prefer current options over changes, even if alternatives are better.
Status quo bias is the preference for the current state of affairs. Individuals often avoid changing due to perceived risks or effort, even when other options are objectively superior.
Holding decision-makers accountable for their choices can reduce bias because…
Accountability increases confidence in gut instincts.
Anticipated justification prompts more thorough information processing.
It limits access to choice alternatives.
People rely more on heuristics when accountable.
Accountability encourages decision-makers to deliberate and consider evidence carefully, reducing reliance on cognitive shortcuts. Knowing they must explain choices deters superficial reasoning.
Which choice pattern most clearly violates expected utility theory but is consistent with prospect theory?
Indifferent between sure and risky outcomes.
Being risk-averse for gains and risk-seeking for losses.
Prefer expected value maximization in every scenario.
Always risk-averse regardless of domain.
Expected utility theory predicts consistent risk preferences, but prospect theory allows people to be risk-averse with gains and risk-seeking with losses, reflecting value function curvature and loss aversion.
A nudge that respects autonomy while promoting healthy eating should…
Hide healthier options among less healthy ones.
Use punitive fines for unhealthy choices.
Enforce mandatory selection of healthy foods.
Use clear opt-out choices and transparent default placement.
Ethical nudges provide clear information and allow easy opt-out to preserve freedom of choice. Transparency and minimal coercion align with libertarian paternalism principles.
The decoy effect leverages behavioral biases by…
Requiring additional information for premium options.
Randomly altering prices daily.
Introducing a third, less attractive option to make one of the original choices more appealing.
Penalizing the least chosen option.
A decoy option is dominated by one alternative, shifting preferences toward that target. This exploits relative comparisons and loss aversion to influence decisions.
Mental accounting influences spending by causing individuals to…
View all money as perfectly fungible across categories.
Spend evenly across all expense types.
Ignore budget constraints.
Segregate money into separate budgets, treating funds differently based on source or purpose.
Mental accounting leads people to create cognitive categories for funds, such as 'entertainment' or 'savings', which affects how they allocate spending. This can result in suboptimal financial decisions due to artificial separations.
Which strategy is most effective at mitigating the planning fallacy?
Estimating time based on best-case scenarios.
Omitting deadlines to reduce pressure.
Reference class forecasting, using data from similar past projects.
Relying solely on expert intuition.
Reference class forecasting mitigates optimism bias by basing estimates on actual outcomes of comparable projects. This counteracts the tendency to underestimate task durations inherent in the planning fallacy.
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Learning Outcomes

  1. Analyse consumer choices shaped by behavioral biases
  2. Evaluate heuristics and their impact on economic decisions
  3. Identify common decision-making fallacies in practice
  4. Apply nudging principles to real-world scenarios
  5. Demonstrate understanding of prospect theory concepts
  6. Master strategies to mitigate cognitive biases in economics

Cheat Sheet

  1. Loss aversion - Imagine you'd rather avoid losing your favorite snack than win a new candy bar - that's loss aversion in action, where people feel losses more intensely than equal gains. It can make you cling to bad investments or avoid change even when the benefit is clear.
  2. Heuristics and shortcuts - Our brains love quick fixes called heuristics, like thinking air travel is super risky after seeing a shocking headline, even though it's quite safe. These mental shortcuts speed up decisions but sometimes trip us into bias-filled traps.
  3. Sunk cost fallacy - Ever kept watching a movie you hated simply because you paid for the ticket? That's the sunk cost fallacy - sticking with choices due to past investments instead of future benefits. Spotting it helps you cut losses and make smarter calls.
  4. Nudging principles - Nudges are gentle pushes - like defaulting folks into a retirement plan - to steer behavior without forcing choices. It's like setting a game to "easy mode" for good habits, boosting participation one nudge at a time.
  5. Prospect theory - Think of it as a roller coaster of feelings: gains and losses loom larger than simple probabilities and can lead us to make wild risk bets. Prospect theory unpacks why $100 feels way different to win than to lose - even if the numbers match.
  6. Hyperbolic discounting - When you choose an ice cream now over a gym membership later, that's hyperbolic discounting - valuing small, instant rewards over bigger, delayed ones. Understanding this quirk helps you build better saving strategies and stick to long-term goals.
  7. Bounded rationality - Our brains have limited RAM, so we often settle for "good enough" choices instead of perfect ones - this is bounded rationality. Think of it as picking a pizza joint quickly when you're starving and scrolling through endless menus isn't an option.
  8. Framing effects - Would you pick "90% fat-free" or "10% fat"? Framing shapes our decisions, even if the facts stay the same. By tweaking how information is presented, marketers and policymakers can sway choices big time.
  9. Endowment effect - That mug you own feels like a treasure compared to an identical one you don't - this endowment effect makes us overvalue what's ours. It's why garage sales can be tricky negotiations!
  10. Social preferences and fairness - We're more than profit-chasing robots; we care about fairness and will even sacrifice personal gain for equal outcomes. Grasping social preferences helps craft policies that everyone cheers for.
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