Behavioral Economics and Decision Theory Flashcards
6 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Behavioral Economics and Decision Theory flashcards as text
The 'ultimatum game' in experimental economics primarily demonstrates which behavioral finding?
Answer: People reject unfair offers even at personal cost
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.
What does 'bounded rationality' mean in the context of economic decision-making?
Answer: Decision-makers use simplified strategies due to cognitive and information constraints
Bounded rationality, coined by Herbert Simon, recognizes that cognitive limitations, incomplete information, and time constraints cause people to use heuristics rather than full optimization.
Which behavioral concept explains why people continue investing in a failing project because of prior irrecoverable costs?
Answer: Sunk cost fallacy
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.
In behavioral economics, 'mental accounting' refers to which tendency?
Answer: Treating money differently depending on its source or intended use
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.
What is 'present bias' in behavioral economics?
Answer: Overweighting immediate utility relative to future utility
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.
Which behavioral finance concept describes investors mimicking the actions of a larger group, often inflating asset bubbles?
Answer: Herding behavior
Herding behavior occurs when investors follow the crowd rather than their own independent analysis, which can amplify market trends and contribute to speculative bubbles.