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 'disposition effect' in behavioral finance describes which investor tendency?
Answer: Selling winning assets too early and holding losing assets too long
The disposition effect, driven by loss aversion and mental accounting, leads investors to realize gains quickly while postponing the realization of losses.
What is the 'availability heuristic' and how does it affect economic decisions?
Answer: Overestimating the probability of events that are easily recalled, distorting risk assessment
The availability heuristic causes people to judge the likelihood of events based on how easily examples come to mind, often leading to overestimation of dramatic but rare risks.
In choice architecture, what does the term 'default option' signify for policy-makers?
Answer: The option individuals receive if they make no active choice, which strongly influences outcomes
Default options exploit status quo bias by making the pre-selected choice the path of least resistance, giving policy-makers powerful leverage without mandating behavior.
What is 'overconfidence bias' and its implication for financial markets?
Answer: Investors overestimate the accuracy of their predictions, leading to excessive trading and risk-taking
Overconfidence bias causes traders to believe their information and judgment are superior to the market's, resulting in excessive trading volume and, on average, lower net returns.
Which concept describes the behavioral tendency to prefer the status quo over change, even when change would be beneficial?
Answer: Status quo bias
Status quo bias reflects loss aversion and inertia: departing from the current situation is framed as a potential loss, making the existing state feel disproportionately attractive.
How does the 'framing effect' influence economic decision-making?
Answer: The same information presented differently leads to different choices
The framing effect shows that people respond differently to logically equivalent information depending on whether it is presented as a gain or a loss, violating classical rationality.