Prospect Theory and Reference-Dependent Utility
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Prospect Theory and Reference-Dependent Utility

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Questions and Answers

What is a common problem according to the text?

  • Lack of interest in market exchange
  • Overwhelming commitment to good intentions
  • Strict government regulations
  • Procrastination and self-control issues (correct)

    • Which principle of Behavioral Economics involves caring about the actions, intentions, and payoffs of others?

  • Principle 4 (correct)
  • Principle 6
  • Principle 5
  • Principle 3

    • What type of example is given to highlight the importance of social preferences in Behavioral Economics?

  • Mathematical puzzles
  • Ultimatum Game (correct)
  • Public speaking anxiety
  • Weightlifting competitions

    • What can partially help protect individuals from behavioral biases?

    <p>Limiting people's choices</p> Signup and view all the answers

    Which statement best summarizes the practical implications of heavy-handed paternalism according to the text?

    <p>It is unpopular and often ineffective</p> Signup and view all the answers

    Why do our final estimates tend to get biased by anchoring heuristics?

    <p>The initial anchor heavily influences our final estimates</p> Signup and view all the answers

    What concept does the quote 'If we plant an idea or a number in your head, it has a very big effect on subsequent judgements' relate to?

    <p>Anchoring bias</p> Signup and view all the answers

    In what way can 'decoys' be used to influence decision-making in example situations like the ones mentioned?

    <p>To steer decisions towards a particular choice</p> Signup and view all the answers

    How does the Availability Bias impact people's judgments?

    <p>It leads people to base judgments on readily available examples</p> Signup and view all the answers

    Why do recent events have a greater impact on behavior according to the Availability Bias?

    <p>Recent events are more vivid and easily recalled</p> Signup and view all the answers

    'Lynda is 31 years old, single, outspoken and very bright.' What type of cognitive bias is this an example of?

    <p>Representativeness bias</p> Signup and view all the answers

    According to Prospect Theory, what is the concept of reference-dependent utility based on?

    <p>Comparison to a reference point</p> Signup and view all the answers

    In Prospect Theory, what does 'loss aversion' refer to?

    <p>People dislike losses more than they like gains of the same size</p> Signup and view all the answers

    How does the value function in Prospect Theory differ between gains and losses?

    <p>It is much steeper for losses than for gains</p> Signup and view all the answers

    What aspect of individual decision-making does Prospect Theory challenge?

    <p>Expected utility theory assumptions</p> Signup and view all the answers

    What role do reference points play in Prospect Theory's analysis of decision-making?

    <p>They influence how gains and losses are evaluated</p> Signup and view all the answers

    How does Prospect Theory explain people's willingness to take risks to exceed a reference point?

    <p>Based on fear of losses</p> Signup and view all the answers

    Which type of preferences are time-consistent according to economists?

    <p>Exponential preferences</p> Signup and view all the answers

    In the hyperbolic discounting model, what does the term '𝛽' represent?

    <p>Short-term discount factor</p> Signup and view all the answers

    What is the key characteristic of present-biased preferences?

    <p>Giving stronger relative weight to the earlier moments</p> Signup and view all the answers

    What phenomenon does hyperbolic discounting aim to capture?

    <p>Greater patience for tradeoffs in the future</p> Signup and view all the answers

    How does hyperbolic discounting differ from exponential discounting?

    <p>It gives stronger weight to immediate rewards</p> Signup and view all the answers

    What does the beta-delta model in hyperbolic discounting aim to explain?

    <p>The dynamic inconsistency in decision-making</p> Signup and view all the answers

    What is the endowment effect?

    <p>When people value items they own more highly than identical items they do not own</p> Signup and view all the answers

    What do experiments typically find regarding the gap between selling and buying prices in relation to the endowment effect?

    <p>Selling prices are about twice as high as buying prices</p> Signup and view all the answers

    In the context of the mug experiment, why do owners usually value their mugs more highly according to standard theory?

    <p>Due to reference dependence and loss aversion</p> Signup and view all the answers

    What would be more surprising based on standard, reference-independent theory when randomly giving half of the students mugs and eliciting buying and selling prices?

    <p>To find no difference between owners and non-owners in their valuations of the mugs</p> Signup and view all the answers

    How can the endowment effect be conceptualized?

    <p>As a combination of reference dependence and loss aversion</p> Signup and view all the answers

    Why might there be a large gap between buying and selling prices in the context of the endowment effect?

    <p>Endowing someone with an item instantaneously makes them value it more highly</p> Signup and view all the answers

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