ECON 200 Chapter 17
You have been entered in a free game where you try to guess the roll of a six-sided die. You will win $50.00 if you guess right. What is your expected payoff value? Round to the nearest cent.
$8.33
Identify the fallacy in each situation.
Each year Beth bets her favorite team will make it to the playoffs, because they have never been there before and she believes they must be overdue. (gambler's fallacy) Evan has not won his fantasy football league in 10 years and believes this will be the year he wins. (gambler's fallacy) Katrina won on the last three scratch tickets she bought at the grocery store, so she continues buying them. (hot hand fallacy)
In Germany, participation in 401(k)-style retirement plans, organ donor programs, and HIV testing is based on opt-in enrollment. In Austria, the same three enrollment choices are framed as opt-out. Drag each participation percentage to its correct location.
Under the Germany: 20%; 12%; 51%; Under the Austria: 76%; 99%; 69%
Using the idea of bounded rationality, identify the reason why, in each situation, a consumer might fail to make the decision that rational models predict.
Armando is shopping for shrubs for his yard. He has tried, unsuccessfully, to find out which shrubs are the most disease-resistant. (limited information) Reilly has been shopping for a new laptop for weeks. At this point, he is having trouble distinguishing the different models he has seen. (limited capacity to process information) Gwyn's car is running out of gas. She stops at the first station she sees. (limited time)
Darius is offered a choice between two gambles on a fair coin flip: (1) Pay $100, win $110 on either heads or tails. (2) Pay $100, win $120 on heads and $70 on tails. Darius chooses (2). What sort of attitude does this choice reveal?
Darius is a risk-taker
Stock price volatility is often driven by fallacies rather than metrics that measure stock valuation.
True
Sean is [blank]. This is an example of the [blank]. Sean believes that the number 17 is overdue. The fact is, recent history makes the number 17 [blank] to be drawn compared to other numbers.
incorrect; gambler's fallacy; equally likely;
On a per [blank] basis, travel by commercial aircraft is much [blank] than travel by automobile, by a factor of about [blank]. One reason people would rather drive than fly may be the greater [blank] afforded by driving.
mile; safer; ten; sense of control;
People often [blank]-anticipate low-probability events and [blank]-anticipate high-probability ones. That is, people tend to behave as if low-probability events were [blank] probable than they really are and as if high-probability events were [blank] probable than they really are.
over; under; more; less;
In a cold opening, a film is [blank] without first being [blank]. Alert moviegoers know to take a cold opening as evidence that the studio does not consider its own film to be very good. That fact that cold openings [blank] box office performance is evidence that many moviegoers are [blank].
released to the public; screened by critics; help; not very alert;
Jorge considers himself a risk-averse person. He takes the opportunity to switch to a new job where there are two possible outcomes: there is a 20% chance that he will earn $30,000 more per year than in his current job, and there is an 80% chance that he will get laid off and end up in a job where he is earning $10,000 less than in his current job. What does this decision tell us about Jorge?
Jorge's assessment of himself as risk-averse is incorrect. He is a risk-taker.
Describe one round of an ultimatum game by placing the events in order. The players are real people rather than ideal players who follow traditional economic theory.
A player is given $100 to divide up as she sees fit. The player dividing the money seeks to maximize her payoff. One player offers the other $1. The player considering the offer thinks about fairness. The player offered $1 refuse to accept it. Both players end up with nothing.
A risk-neutral person will refuse to take a gamble with any risk.
False
Melanie is offered a choice between two gambles on a fair coin flip: (1) Pay $50, win $70 on either heads or tails. (2) Pay $50, win $10 on heads and $120 on tails. Melanie chooses (1). Now Melanie is given a third option: (3) Pay $50, win $40 on heads and $110 on tails. Given the choice to stay with gamble (1) or switch to gamble (3), Melanie chooses (3). What sort of attitude toward risk do Melanie's choices reveal?
Melanie is risk-neutral
Two similar groups of about 300 people each took the same survey, except that the order of the questions differed for each group. One question was answered "Yes" by 75% of one group but only by 50% of the other group. What might have happened?
The difference is due to priming effects.
Which features of the television game show Deal or No Deal made the program of interest to economists?
The show provided insights into how people weight the utilities of outcomes. No skill was involved.
The standard model of risk behavior assumes that people are [blank] in their risk-taking preferences. According to traditional economic theory, Michael should maximize his utility based on a rigid calculation of expected value. However, Michael's change in behavior caused by the fall in the stock market is consistent with a concept from psychology known as [blank]. This concept suggests that people weigh the utilities and risks of gains and losses [blank]. After the initial setback, Michael has become [blank] tolerant of risk in an effort to make up for his losses.
consistent; prospect theory; differently; more;
50% of the time, a lottery ticket pays $1,000. The other 50% of the time, it pays $0. Calculate the expected value of the gamble.
$500
Two people are playing an ultimatum game with $100. Player 1 can make an offer to Player 2, who can either accept or reject it. If Player 2 accepts, then they split the money according to Player 1's offer. If Player 2 rejects, then neither of them get any money. If Player 1 offers $2 to Player 2, what does traditional economic theory say Player 2 will do?
Player 2 will accept the offer
Identify each scenario as representing good or bad intertemporal decision-making.
A runner maintains a steady pace in the early part of a 10k race, rather than sprinting to be at the front of the pack. A diner enjoying a home-cooked meal declines a second helping to save room for dessert.
The diagram shows an ultimatum game in which Player 1 gets to decide how to share $1,000 with Player 2. If Player 2 accepts the offer, the sum is split according to the proposal. If Player 2 rejects the offer, neither player gets anything. (The dollar amounts shown in parentheses indicate the payoffs to Player 1 and Player 2, in that order.) In terms of traditional economic theory, which choices by Player 2 would be irrational? To answer, click or tap the appropriate "Accept" or "Reject" boxes below.
Fair proposal: Player 2: Reject ($0,$0) Unifair proposal: Player 2: Reject ($0,$0)
A company has a 401(k) savings plan for its employees. The participation rate will be about the same whether people are given an easy enrollment form to fill out or are enrolled automatically but given an easy opt-out form to complete if they don't want to participate.
False
Click on the two gambles selected by the 30% of test subjects who illustrate the Allais paradox.
Gamble A: No gamble-receive $1 million in cash 100% of the time Gamble C: A lottery ticket that pays $5 million 10% of the time and nothing 90% of the time.
Click on the two gambles that would be selected by a gambler seeking to maximize the expected value of his or her payoff.
Gamble B: A lottery ticket that pays $5 million 10% of the time. $1 million 89% of the time, and nothing 1% of the time. Gamble C: A lottery ticket that pays $5 million 10% of the time and nothing 90% of the time.
Order the expected values of the following gambles from least to greatest.
Probability of winning: 80% payout: $1,000 Probability of winning: 15% payout: $10,000 Probability of winning: 50% payout: $5,000
Mary could be exhibiting [blank] because she wants to maintain her current work environment. Mary values keeping her current wage and familiar coworkers more than the opportunity to enhance her welfare. In this scenario, traditional economic theory assumes Mary would choose to [blank] the higher-paying job. The field of economics that helps us understand why people's decisions sometimes contradict standard assumptions about rationality is called [blank] economics.
status quo bias; accept; behavioral;
Identify the level of protection afforded by each dog-based home security measure.
effective against all burglars (a guard dog) effective only against boundedly rational burglars (a "Beware of Dog!" sign, with no dog)
Jaime mailed in a raffle entry off the side of a cereal carton. The carton said that 1 in 800,000 entries would win. Which of the following is a rational motivation for Jaime to enter the raffle?
The raffle has a positive expected value.
Match the situation to the decision-making difficulty that best describes it.
A driver is reluctant to get rid of a car that turned out to be a bad buy, even though she could then buy a better one. (status quo bias) Wayne has a good salary and wants to have a comfortable retirement, but always seems to spend his entire paycheck. (intertemporal decision-making) A survey about the weather first asks respondents how often it has rained, then asks them if they believe there has been a drought. (priming effects)
Amanda needs to buy a new car for work. She has one day to find a car and was able to read only one article about new cars before she went to the dealership. Which of the following options describe how bounded rationality is at work in this situation?
Amanda has a limited amount of information with which to make her decision. Amanda feels pressured by the time constraints on her purchase.
Two monkeys, Mike and Ike, are each given a simple task and, upon completion, rewarded with either a piece of cucumber (acceptably tasty) or a grape (delicious). Identify Ike's response to the food reward in each scenario.
Each monkey is offered a grape. Each monkey is offered a cucumber. Ike is offered a grape, while Mike is offered a cucumber.
Research by economist Maurice Allais illustrated that people make decisions consistently according to their risk preference, regardless of their financial circumstances.
False
Anakin is given three options: (1) Pay $100 for an 80% chance of winning $400. (2) Pay $100 for a 30% chance of winning $600. (3) Pay $100 for a sure-thing payout of $300. If Anakin is a risk-neutral gambler, which way will he choose?
He will take the 80% chance of winning $400.
Which of the following situations may show framing or priming effects?
The results of a customer satisfaction survey are influenced by the order of the questions. Employees at a company are more likely to sign up for a new benefit if they are automatically enrolled with the option to opt out, rather than given the chance to enroll for themselves.
In an experiment, children were given a marshmallow and were promised a second marshmallow if they could wait 15 minutes to eat the first one. Only about one-third of the children earned the second marshmallow. What does this experiment illustrate about children's rationality?
difficulty with inter temporal decision-making
If the contestant picks curtain number 1, initially that curtain has a [blank] probability of being the one with the car. If the host then draws back curtain number 2 to show a goat, at that point the probability that the car is behind curtain number 1 is [blank], the probability that the car is behind curtain number 2 is [blank], and the probability that the car is behind curtain number 3 is [blank].
⅓; ⅓; 0; ⅔;