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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

  1. A firm offers customers 'buy 10 get 1 free' rather than a 10% price discount. This tactic exploits which cognitive bias?

    Answer: Evaluation mode and ratio bias

    Ratio bias leads consumers to prefer a larger numerator (1 free out of 11) over an equivalent percentage discount, making the offer feel more generous.

  2. In the context of intertemporal choice, hyperbolic discounting predicts that discount rates are:

    Answer: Higher for shorter delays and lower for longer delays

    Hyperbolic discounting assigns disproportionately high discount rates to near-term delays, creating present bias and preference reversals over time.

  3. Which term describes the cognitive shortcut where people judge probability by how easily an example comes to mind?

    Answer: Availability heuristic

    The availability heuristic leads individuals to overestimate the likelihood of events that are easily recalled, often due to recency or vividness.

  4. A CEO continues funding a failing project because $50 million has already been spent on it. This illustrates:

    Answer: Sunk cost fallacy

    The sunk cost fallacy is the tendency to continue investing in a project due to past unrecoverable costs rather than future expected value.

  5. Overconfidence bias in financial markets most directly contributes to:

    Answer: Excessive trading and underestimation of investment risk

    Overconfident investors overestimate their forecasting ability, leading to excessive trading that typically reduces net returns after transaction costs.

  6. The 'compromise effect' in consumer choice means buyers tend to:

    Answer: Choose the middle option in a product lineup rather than extremes

    The compromise effect causes consumers to avoid extreme choices, gravitating toward the middle option when it is positioned between two more extreme alternatives.

  7. Which policy intervention uses 'if-then implementation intentions' to help individuals follow through on their stated plans?

    Answer: Commitment devices

    Commitment devices harness implementation intentions by having individuals specify in advance exactly when, where, and how they will act, reducing the gap between intention and behavior.