CBE Behavioral Economics 4

Question 1

According to Thaler and Sunstein's nudge theory, a 'nudge' is best characterized as:

Accepted Answer

An environmental change that predictably alters behavior while preserving choice

Answer

A nudge alters the choice architecture to steer behavior in a predictable direction without forbidding any options or significantly changing economic incentives.

Question 2

The 'planning fallacy' refers to the tendency of individuals and organizations to:

Accepted Answer

Underestimate the time, costs, and risks of future actions while overestimating benefits

Answer

The planning fallacy causes systematic underestimation of project duration and cost, largely because planners focus on the best-case scenario rather than base rates from similar past projects.

Question 3

In Kahneman's dual-process theory, System 1 thinking is characterized by:

Accepted Answer

Fast, automatic, intuitive, and associative processing

Answer

System 1 operates automatically and quickly with little conscious effort, relying on heuristics and associations rather than deliberate analysis.

Question 4

A consumer buys a gym membership but stops going after two months, yet keeps paying because 'I already paid for it.' Which bias is primarily at work?

Accepted Answer

Sunk cost fallacy

Answer

Continuing to pay for an unused gym membership to justify past spending exemplifies the sunk cost fallacy—rational agents ignore unrecoverable past costs.

Question 5

Which behavioral concept explains why people prefer a sure gain of $50 over a 50% chance of winning $100, even though the expected values are identical?

Accepted Answer

Risk aversion in the domain of gains

Answer

Risk aversion in the gains domain (captured by the concave value function of prospect theory) causes individuals to prefer certain smaller gains over probabilistically equivalent larger ones.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Behavioral Economics 4