CEA Behavioral Economics and Decision Theory 1

Question 1

Which concept in behavioral economics describes the tendency for individuals to weigh losses more heavily than equivalent gains?

Accepted Answer

Loss aversion

Answer

Loss aversion, a key finding by Kahneman and Tversky, shows that losses typically feel about twice as painful as equivalent gains feel pleasurable.

Question 2

The 'endowment effect' in behavioral economics refers to which phenomenon?

Accepted Answer

People overvalue things they already own

Answer

The endowment effect occurs when people ascribe more value to items simply because they own them, leading to irrational pricing and trading behavior.

Question 3

What does 'hyperbolic discounting' describe in behavioral economics?

Accepted Answer

Preference for immediate rewards that leads to time-inconsistent choices

Answer

Hyperbolic discounting describes how people disproportionately prefer immediate payoffs over future ones, causing preferences to reverse as the time horizon changes.

Question 4

In prospect theory, how are outcomes typically evaluated?

Accepted Answer

Relative to a reference point rather than in absolute terms

Answer

Prospect theory, developed by Kahneman and Tversky, evaluates outcomes as gains or losses relative to a reference point, not as final wealth states.

Question 5

Which term describes the behavioral economics concept where people rely too heavily on the first piece of information encountered when making decisions?

Accepted Answer

Anchoring

Answer

Anchoring occurs when an individual relies too heavily on an initial piece of information (the anchor) when making subsequent judgments or estimates.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Behavioral Economics and Decision Theory 1