Decision-Making and Behavioral Economics Quiz

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Questions and Answers

What form of seven-letter words ending with 'ing' would you expect to find in four pages of a novel (about 2,000 words)?

16+ words

0-1 words

5-7 words

3-4 words (correct)

What is the tendency to believe that outcomes of random events can be predicted called?

Risk aversion

Randomness error (correct)

Sunk cost fallacy

Irrational commitment

What is a key characteristic of risk aversion?

Strong inclination to avoid losses (correct)

Preference for risky outcomes

Preference for superstitions

Desire for unpredictable results

What describes a sunk cost?

Costs already incurred and irrecoverable Signup and view all the answers

What commonly influences people to keep investing in losing propositions?

Sunk cost fallacy Signup and view all the answers

What is irrational escalation of commitment?

Increasing dedication despite negative evidence Signup and view all the answers

In which situation do people tend to take chances despite risks?

To prevent a negative outcome Signup and view all the answers

What drives superstitions according to randomness error?

Desire for control over outcomes Signup and view all the answers

What is the primary characteristic of rational decision-making?

Maximizing choices within constraints Signup and view all the answers

Which assumption is NOT typically met in rational decision-making?

Time and cost constraints Signup and view all the answers

Bounded rationality refers to limitations in our ability to:

Interpret, process, and act on information Signup and view all the answers

Satisficing is best described as:

Choosing an option that meets acceptable criteria Signup and view all the answers

What role do judgment shortcuts play in decision-making?

They allow for faster decision-making at the expense of accuracy Signup and view all the answers

Intuition in decision-making is often based on:

Previous experiences and subconscious processing Signup and view all the answers

Which of the following statements about decision-making is true?

Actual decision-making often deviates from rational models Signup and view all the answers

In rational decision-making, clear preferences imply that:

Criteria and alternatives can be ranked and weighted Signup and view all the answers

What does the anchoring bias refer to?

Using early information as a basis for later judgments. Signup and view all the answers

How does the planning fallacy affect our task predictions?

People tend to underestimate the time required for their own tasks. Signup and view all the answers

What is a potential consequence of the hindsight bias?

Leads to unrealistic confidence in future predictions. Signup and view all the answers

Which of the following strategies helps mitigate biases in decision-making?

Seeking out disconfirming information. Signup and view all the answers

What is a common outcome of applying the framing effect?

The same situation can lead to different choices based on presentation. Signup and view all the answers

Which rationale explains the optimistic bias in predicting task duration?

Underestimating past experiences. Signup and view all the answers

What effect does irrational commitment have on decision-making?

It can result in sticking to poor decisions due to prior investments. Signup and view all the answers

When do individuals typically show a pessimistic bias according to the content?

When assessing the tasks of others. Signup and view all the answers

What does satisficing refer to in decision-making?

Selecting the first acceptable option Signup and view all the answers

Which of the following best describes intuition in decision-making?

A non-conscious process from distilled experience Signup and view all the answers

What is the primary risk associated with overconfidence bias?

Overestimating one's ability to make good decisions Signup and view all the answers

What does confirmation bias involve?

Selecting only facts that support our existing beliefs Signup and view all the answers

Which cognitive bias emphasizes information that is most readily available?

Availability bias Signup and view all the answers

What is the Dunning-Kruger effect primarily associated with?

Low ability individuals overestimating their competence Signup and view all the answers

What does the attribution theory of perception suggest about decision-making?

Perceptions can often overshadow reality Signup and view all the answers

Which factor is NOT commonly associated with making bad decisions?

Being too thorough in analysis Signup and view all the answers

Study Notes

Organizational Behaviour - Chapter 9 - Decision Making

A flowchart can help determine if a decision might be bad.
The agenda for the chapter includes how decisions should be made, how individuals actually make decisions, and the role of intuition in effective decision-making.
Rational decision-making involves choosing a course of action from several alternatives, aiming for value-maximizing choices within constraints, based on classical/neoclassical economics principles.
The rational decision-making model includes defining the problem, identifying criteria, allocating weights to criteria, developing alternatives, evaluating alternatives, and selecting the best alternative.
Assumptions of the rational decision-making model include problem clarity, known options, clear preferences, constant preferences, no time or cost constraints, and maximum payoff.

Rational Decision Making Model

Identifying a clear problem is crucial for effective decision-making.
Identifying relevant criteria is essential for evaluating options.
Assigning weights to criteria helps prioritize them.
Developing multiple alternatives for consideration is key to thorough decision-making.
Evaluating alternatives thoroughly will aid in selecting the best option.
Selecting the best alternative involves choosing the option that meets the established criteria most effectively.

Rational Decision-Making-Assumptions

Problems are clear and unambiguous.
All possible options are known.
Preferences are clear and consistent across time.
Criteria are constant, and their weighting also remains stable.
Resources are not constrained by time or cost.
The choice selected will yield the highest perceived value.

"Rational" Decision Making

The way we actually make decisions might not align with the traditional economic model.
The chapter's evidence states that many management theories rest on economic principles.
"Economic agents" are assumed as opportunistic and self-interested.

Actual Decision Making

Bounded rationality involves limitations in the ability to process all available information.
Satisficing involves choosing the first good-enough option rather than seeking the optimal solution.
Intuition is a non-conscious process using past experiences to make quick decisions.
Judgment shortcuts, such as selective perception, halo effect, projection, and stereotyping, influence decision-making.

Shortcuts in Making Decisions

Taking shortcuts in decision-making can lead to bad outcomes.
Decision-makers often have biases that influence their choices.

Biases in Decision Making

Overconfidence bias occurs when someone overestimates their ability to make good judgements.
Dunning-Kruger effect refers to a cognitive bias where people with low ability in a particular area tend to overestimate their abilities.
Confirmation bias focuses on choosing/ using information that supports pre-existing beliefs.
Availability bias is influenced by readily available information, which might be vivid events.
Randomness error occurs when trying to predict an outcome based on random events.
Irrational escalation of commitment is increasing commitment to a decision despite negative evidence.
Anchoring bias focuses on the initial piece of information influencing subsequent decisions.

Risk Aversion

Preferring certainty over uncertainty—a preference for a sure thing over a potential risky outcome.
"Loss aversion" refers to a stronger feeling of loss than gain.

Sunk Cost Fallacy

This involves the tendency to invest further resources in an existing endeavor, even if it's proven unprofitable.
Continuing investment due to prior investments, even if these investments are not expected to return positive or expected outcomes.

Framing

The way a decision is phrased, or its context, affects the choice.
The way an option is framed has a significant impact on decision-making.

Planning Fallacy

Underestimating the time required to complete a project or task is characteristic.
People show optimistic bias in predicting their own task completion times.
Tasks completed by others are often overestimated due to pessimistic bias.

Hindsight Bias

The tendency to believe that a past event could have been predicted is characteristic.
The knowledge of the outcome can influence our perceptions of the past.

Decision-Making Improvements

Focus on goals to avoid options not aligned.
Seek disconfirming information to broaden perspectives.
Avoid generating meaning from random events.
Increase potential options to expand choices.

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Description

Test your understanding of key concepts in decision-making and behavioral economics with this quiz. Explore terms such as risk aversion, sunk costs, and rationality. This quiz is designed to challenge your comprehension of these important psychological principles.