Behavioral Biases Quiz

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Questions and Answers

Explain the concept of loss aversion.

Loss aversion is when humans emphasize a loss over a potential gain, perceiving the loss as greater. This leads to less rational behavior as people take more risks.

Provide an example of anchoring and how it influences decision making.

Anchoring is when people use a certain idea as a reference point for another concept. For example, seeing a $1200 shirt makes a $100 shirt seem cheap, influencing the decision to purchase.

What is framing and how does it affect people's reactions?

Framing is when people react differently to something based on how it is presented, rather than the content itself. It influences decisions based on the presentation or context.

Explain the concept of availability heuristic.

Availability heuristic is when humans judge the frequency or likelihood of an event based on past examples they can recognize. For example, being more likely to buy a lottery ticket if your uncle won the lottery. Signup and view all the answers

How does default bias influence human behavior?

Default bias occurs when humans follow routines or habits that are hard to break, leading to a preference for familiar products or actions. For example, Angelina going to Boost for the same drink every time. Signup and view all the answers

Why are people more likely to take risks under the influence of loss aversion?

People are more likely to take risks under loss aversion because they perceive losses as more significant than potential gains. This causes them to seek risky options to avoid losses. Signup and view all the answers

What is bounded rationality?

Bounded rationality is when humans make decisions based on limited information, leading to simplified choices and decisions. Signup and view all the answers

Provide an example of bounded rationality.

An example of bounded rationality is when a person chooses 'free-range' eggs based on ethics without fully understanding what 'free-range' means. Signup and view all the answers

What is bounded self-control?

Bounded self-control refers to individuals having limits on their self-control, hindering their ability to maximize utility. Signup and view all the answers

Give an example of bounded self-control.

An example of bounded self-control is when someone fails to save money despite understanding the importance of saving for long-term financial stability. Signup and view all the answers

What is bounded selfishness?

Bounded selfishness is when consumers perform altruistic acts without expecting direct rewards or personal utility. Signup and view all the answers

Explain imperfect information in consumer decision-making.

Imperfect information refers to consumers making decisions based on uniformed or wrongly informed choices due to lack of access to perfect information. Signup and view all the answers

Study Notes

Cognitive Biases and Heuristics

Loss Aversion: The tendency to prefer avoiding losses to acquiring equivalent gains. People tend to fear losses more than they value gains, leading to risk aversion when it comes to potential losses.

Anchoring Effect

Anchoring: The tendency to rely too heavily on the first piece of information encountered when making a decision, even if it is irrelevant or unreliable.
Example: A store listing a higher "original" price next to a lower "sale" price to make the sale price appear more attractive.

Framing Effect

Framing: The way information is presented influences people's reactions and decisions.
Example: A product description that emphasizes 90% fat-free instead of 10% fat may lead to a more positive perception.

Availability Heuristic

Availability Heuristic: The tendency to overestimate the importance or likelihood of information that is readily available, rather than seeking a more diverse range of information.
Example: Overestimating the danger of plane crashes due to frequent media coverage.

Default Bias

Default Bias: The tendency to stick with the default option, rather than taking the time to consider alternative options.
Example: Employees are more likely to enroll in a retirement plan if they are automatically enrolled, rather than having to opt-in.

Loss Aversion and Risk-Taking

Risk-Taking under Loss Aversion: When people face potential losses, they are more likely to take risks to avoid the loss, even if it means potentially losing more.

Bounded Rationality

Bounded Rationality: The idea that humans make decisions based on limited information, cognitive biases, and mental shortcuts, rather than perfect rationality.
Example: A consumer choosing a product based on a limited number of factors, rather than considering all available information.

Bounded Self-Control

Bounded Self-Control: The limited ability to exert self-control over desires, impulses, and emotions, leading to suboptimal decision-making.
Example: A person struggling to resist the temptation of junk food, despite knowing it's unhealthy.

Bounded Selfishness

Bounded Selfishness: The idea that people are not entirely selfish, but rather have a mix of altruistic and self-interested motivations.
Example: A person donating to charity, despite it not being in their direct self-interest.

Imperfect Information in Consumer Decision-Making

Imperfect Information: Consumers often have incomplete or inaccurate information about products, leading to suboptimal decision-making.
Example: A consumer overestimating the quality of a product based on advertising, rather than seeking out independent reviews.

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Description

Test your knowledge on common behavioral biases such as default bias, loss aversion, and anchoring. Explore how these biases affect decision-making and behavior in daily life.