CBE Behavioral Economics 3

Question 1

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

Accepted Answer

Evaluation mode and ratio bias

Answer

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.

Question 2

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

Accepted Answer

Higher for shorter delays and lower for longer delays

Answer

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

Question 3

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

Accepted Answer

Availability heuristic

Answer

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

Question 4

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

Accepted Answer

Sunk cost fallacy

Answer

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

Question 5

Overconfidence bias in financial markets most directly contributes to:

Accepted Answer

Excessive trading and underestimation of investment risk

Answer

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

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Behavioral Economics 3