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

In the ultimatum game, responders frequently reject low offers to punish perceived unfairness, contradicting the standard rational-agent prediction that any positive offer should be accepted.

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

Bounded rationality, coined by Herbert Simon, recognizes that cognitive limitations, incomplete information, and time constraints cause people to use heuristics rather than full optimization.

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

The sunk cost fallacy causes individuals to factor in already-spent, irrecoverable costs when making forward-looking decisions, leading to economically irrational continuation of bad investments.

Question 4

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

Accepted Answer

Treating money differently depending on its source or intended use

Answer

Mental accounting, described by Thaler, is the tendency to categorize and evaluate economic outcomes by grouping them into separate mental 'accounts' rather than treating all money as fungible.

Question 5

What is 'present bias' in behavioral economics?

Accepted Answer

Overweighting immediate utility relative to future utility

Answer

Present bias describes the tendency to give stronger weight to present payoffs than to future ones, even when the future benefits are much larger, leading to self-control problems.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Behavioral Economics and Decision Theory 2