CBE Behavioral Economics 2

Question 1

Which concept describes the tendency for people to rely too heavily on the first piece of information encountered when making decisions?

Accepted Answer

Anchoring bias

Answer

Anchoring bias occurs when individuals over-weight the initial information (the anchor) when making subsequent judgments or decisions.

Question 2

A company sets its product's default option as the premium tier rather than the basic tier. This strategy primarily leverages which behavioral principle?

Accepted Answer

Default effect

Answer

The default effect exploits inertia—people tend to stick with pre-selected options, so setting a premium default increases uptake.

Question 3

In behavioral economics, 'mental accounting' most directly explains why consumers:

Accepted Answer

Treat money differently depending on its source or intended use

Answer

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.

Question 4

Which of the following best illustrates the 'endowment effect'?

Accepted Answer

A seller valuing an owned coffee mug higher than a buyer is willing to pay

Answer

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.

Question 5

The concept of 'time inconsistency' in behavioral economics best describes:

Accepted Answer

Preferences that reverse as the time horizon for a decision changes

Answer

Time inconsistency (or dynamic inconsistency) occurs when preferences between delayed outcomes reverse as those outcomes become more imminent, often modeled with hyperbolic discounting.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Behavioral Economics 2