CEA Behavioral Economics and Decision Theory 2

Question 1

The 'ultimatum game' in experimental economics primarily demonstrates which behavioral finding?

Accepted Answer

People reject unfair offers even at personal cost

Answer

People always maximize their own monetary payoff

Answer

Rational actors never deviate from Nash equilibrium

Answer

Cooperation collapses without repeated interaction

Question 2

What does 'bounded rationality' mean in the context of economic decision-making?

Accepted Answer

Decision-makers use simplified strategies due to cognitive and information constraints

Answer

Rationality is strictly bounded by income constraints

Answer

Agents always reach optimal decisions given enough time

Answer

Preferences are fixed and transitive across all choices

Question 3

Which behavioral concept explains why people continue investing in a failing project because of prior irrecoverable costs?

Accepted Answer

Sunk cost fallacy

Answer

Moral hazard

Answer

Adverse selection

Answer

Status quo bias

Question 4

In behavioral economics, 'mental accounting' refers to which tendency?

Accepted Answer

Treating money differently depending on its source or intended use

Answer

Calculating opportunity costs mentally before every purchase

Answer

Discounting future income relative to current income

Answer

Overestimating the value of windfall gains

Question 5

What is 'present bias' in behavioral economics?

Accepted Answer

Overweighting immediate utility relative to future utility

Answer

Preferring current prices over projected future prices

Answer

Discounting past losses relative to present gains

Answer

Anchoring forecasts to present economic conditions

Question 6

Which behavioral finance concept describes investors mimicking the actions of a larger group, often inflating asset bubbles?

Accepted Answer

Herding behavior

Answer

Overconfidence bias

Answer

Gambler's fallacy

Answer

Disposition effect