CBE Behavioral Economics 5

Question 1

Which of the following is the most accurate description of 'choice overload'?

Accepted Answer

Excessive options can paradoxically reduce satisfaction and the likelihood of making a choice

Answer

The choice overload effect (Iyengar and Lepper) shows that beyond a moderate number of options, additional choices increase regret, decision difficulty, and option avoidance.

Question 2

In behavioral public finance, a 'sin tax' is most consistent with which behavioral economics justification?

Accepted Answer

Offsetting present bias that causes individuals to over-consume goods with delayed costs

Answer

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.

Question 3

Which behavioral finance concept explains why investors sell winning stocks too early while holding losing stocks too long?

Accepted Answer

Disposition effect

Answer

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.

Question 4

A policy maker wants to increase organ donation rates. According to behavioral economics, which intervention would likely be MOST effective?

Accepted Answer

Switching from opt-in to opt-out registration (presumed consent)

Answer

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.

Question 5

The 'ostrich effect' in behavioral economics describes the tendency to:

Accepted Answer

Avoid checking portfolio performance during market downturns to prevent negative emotions

Answer

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.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Behavioral Economics 5