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 of the following is the most accurate description of 'choice overload'?
Answer: Excessive options can paradoxically reduce satisfaction and the likelihood of making a choice
The choice overload effect (Iyengar and Lepper) shows that beyond a moderate number of options, additional choices increase regret, decision difficulty, and option avoidance.
In behavioral public finance, a 'sin tax' is most consistent with which behavioral economics justification?
Answer: Offsetting present bias that causes individuals to over-consume goods with delayed costs
Beyond externalities, sin taxes on cigarettes, alcohol, and sugary drinks are justified behaviorally by present bias—consumers underweight future health costs when making current consumption decisions.
Which behavioral finance concept explains why investors sell winning stocks too early while holding losing stocks too long?
Answer: Disposition effect
The disposition effect, rooted in prospect theory's loss aversion and reference-point dependence, causes investors to realize gains quickly (locking in the pleasure) while deferring loss realization.
A policy maker wants to increase organ donation rates. According to behavioral economics, which intervention would likely be MOST effective?
Answer: Switching from opt-in to opt-out registration (presumed consent)
Switching to an opt-out (presumed consent) system leverages the default effect and inertia, dramatically increasing donor registration rates as shown in cross-country comparisons.
The 'ostrich effect' in behavioral economics describes the tendency to:
Answer: Avoid checking portfolio performance during market downturns to prevent negative emotions
The ostrich effect refers to the tendency to ignore negative financial information by deliberately not seeking it out, as monitoring losses is emotionally costly under loss aversion.
Libertarian paternalism, the philosophical foundation of nudge theory, holds that:
Answer: Choice architecture should guide people toward better outcomes while fully preserving freedom of choice
Libertarian paternalism aims to help people make choices aligned with their own long-term interests by structuring choice environments, without restricting options or imposing mandates.
Which of the following best describes 'narrow framing' as a behavioral bias in investment decision-making?
Answer: Evaluating each investment in isolation rather than as part of the overall portfolio
Narrow framing causes investors to evaluate each asset's gains and losses separately rather than assessing the combined impact on total wealth, leading to suboptimal risk-taking decisions.