DSS 315 Midterm and Weekly Quizzes (UPDATED)

Roughly what is the percentage of mutual funds will outperform the market both this year and the next year?

Around 6%

Specific actions of parties engaged in competitive irrationality are:

Not easily identified as irrational.

People display inconsistency by:

Preferring a nominal wage increase that does not cover inflation over a wage cut.

Which of the following is a useful advice for a competing party that wishes to avoid competitive escalation of commitment?

Pursue mutual disclosure of intentions between you and your competitor.

Over time, the performance of mutual funds tends to:

Regress to the mean.

In Let's Make a Deal, the probability that the prize is behind the first door you picked is:

33.3%

Tor F Spontaneous behaviors are better predicted by implicit attitudes, while thoughtful behaviors are better predicted by explicit attitudes.

True

Fairness appears to be a universal concept, but its implementation depends on _______ norms.

cultural or social

A recent Harvard graduate was beginning his first teaching job at a Jesuit school in Philadelphia. Despite having an in depth understanding of the subject he was teaching, the teacher realized that the students had difficulties understanding what he taught. The teacher's inability to come across is likely due to:

curse of knowledge bias

In a famous 1990 experiment, "tappers" were asked to tap a song and "listeners" were asked to guess the song being tapped. Before tapping the song, the tappers were asked to estimate the rate of success of the listeners. The study found that the tappers greatly overestimated the listener's ability to recognize the song. This experiment clearly demonstrates the effects of:

curse of knowledge bias

Which of the following is not likely to produce escalation of commitment?

A present decision that is likely to generate further losses.

Research has shown that suppressing stereotypes against out-group members causes:

A temporary reduction in cognitive capacity and a feeling of discomfort.

The tendency to escalate commitment is more pronounced when:

All of the above a. The commitment is to a failed decision made by oneself. b. The failure of the initial commitment can be explained with a causal, unrelated account. c. The escalation is made by an individual, compared with escalation made by a group.

___________ has nothing to do with memory.

inattentional blindness

What is the name given to the tendency to falsely think we rank more highly than others?

overplacement

Per class discussion, business analytics is focused...

prescriptive, predictive, and descriptive

In problem solving, what does the heuristic function estimate?

the distance of a state from the goal

Defining the problem, identifying and weighing criteria for evaluating solutions, generating and rating alternatives, and computing the optimal decision are the six steps of

the rational decision-making process

The definition of rationality is based on a number of notions. Which of the following is NOT one of them? - performance measure - whether success was ultimately achieved or not - percept sequence aka inputs aka available knowledge

whether success was ultimately achieved or not

In order to come out to themselves as "winners" and to avoid becoming "losers", investors tend to:

Hold on to stocks that are trading below purchase price.

Which is not a good mechanism for protecting oneself from irrational escalation of commitment?

Identify reasons for justifying the initial course of action, in order to avoid the creation of cognitive dissonance, which ultimately leads to irrational escalation of commitment.

Which of the following helps to eliminate the influence of fairness considerations?

NONE OF THESE a. Repeating games b. Raising the stakes in games c. Reducing the amount of available resources after an initial offer is rejected

Which of the following is an underlying mechanism of escalation of commitment?

Self-justification.

Which bias underlies the tendency of people to overclaim credit for their contribution to an outcome?

Self-serving attributions

The basic psychological process underlying in-group favoritism is that we tend to identify with people who are ___________ to us.

Similar

People probably do not invest enough in:

Stocks in the long-term.

Which false assumption is often made by professionals such as lawyers, financial advisers and real-estate agents regarding potential conflicts of interest?

That they themselves are immune from the effects of conflicts of interest.

Research on the psychology of conflicts of interest suggests that an auditor is psychologically incapable of maintaining a truly unbiased judgment as long as:

The auditor depends on its clients for future contracts.

When deciding whether or not to escalate commitment to a chosen course of action, our choice should depend on:

The expected value of further investment.

I thought about the best route from my house to downtown. I decided for the most direct route instead of the highway, but ended up stuck in traffic. Which heuristic or bias is best captured by the sentence "Ah! I *knew* I should have taken the highway!"

The hindsight bias

Compared to System 1 Thinking, System 2 Thinking is slower. (T/F)

True

Investors' expectations of future performance of mutual funds are negatively correlated with actual returns.

True

T or F Disclosure of conflicts of interest can increase biases stemming from these conflicts.

True

T or F The confirmation trap is a primary underlying bias of escalation of commitment.

True

T or F When Moore and his colleagues examined investor behavior in the lab, the participants behaved similar to investors in real markets - they chose too many actively managed funds that made too many trades and charged high fees.

True

Which of the following condition can increase one's willingness to engage in altruistic punishment?

When the person who is treated unfairly belongs to an in-group.

Why do women achieve better investment results than men?

Women display greater patience than men and a lower turnover rate. Women don't hurry as much as men to sell their stocks and buy new ones.

You are an avid Yankee fan. This is so much so the case that you think they are the best team in baseball, and when confronted with a counterargument, only present information that relates to positive things the team has done. Along with this, you refuse to acknowledge the information put forth by anyone who is not a Yankee fan. The phenomenon that most likely is affecting your thinking is:

confirmation trap bias

Which of the following heuristics is *not* one of the four major ones discussed in class? -confirmation -contagion -availability -representativeness

contagion heuristic

Moral issues produce ______________ reactions that, in turn, often drive our cognitive assessments.

emotional

One of the main goals of this course is the study of the effects of _________ on _________

heuristics and biases; decision-making

A letter comes in the mail informing an individual that he was accepted into a college. When he tells his mother she says, "I really had a feeling that you were going to get in" (even though, objectively, she had no way to predict the outcome). This is an example of:

hindsight bias

Which bias is defined as the tendency, after an event has occurred, to see the event as having been predictable?

hindsight bias

Why is it so hard for managers to internalize the sunk-cost concept when making decisions?

it is hard to recognize the reasons for including sunk costs in our calculations in the first place.

Groups are _________ likely than individuals to escalate commitment; group escalation of commitment is likely to be ____________ extreme than individual escalation of commitment.

less; more.

Someone who obsesses over the decision he is making, in an attempt to make absolutely sure that it is the very best decision possible, is most likely to be a

maximizer

You are at a casino playing Black Jack. You have lost 3 consecutive hands and decide to bet a large sum of money because you think your luck is guaranteed to turn. Which bias is likely responsible for this decision?

misconception of chance

Kevin is playing roulette at the casino. The ball has landed on a red number the past 3 spins. Kevin decides to bet on black because he feels that it is improbable for the ball the land on red 4 times in a row. Which common bias is Kevin acting on?

misconception of chance bias

The focus of focalism is _______________. On the other hand, the focus of anchoring _____________.

mostly emotional responses, broad

A fair coin is tossed three times, resulting in head every time. A gambler observes the tosses and concludes that a tail in the next toss is practically guaranteed. Is the gambler correct?

no

From a strictly rational standpoint, the price at which a stock was purchased should be regarded as:

Arbitrary and meaningless.

Which of the following best describes nonrational escalation of commitment?

Commitment to a previous course of action beyond the point prescribed by rational models of decision making.

In problem solving, the value calculated by a heuristic function is always a perfectly accurate measure of the actual value of the state. (T/F)

False

On average, actual returns of stocks picked by women are higher than returns of stocks picked by men.

False

People never miss visual changes in the surrounding environment. (T/F)

False

T or F An investor should avoid buying a diversified portfolio of stocks, since it may lead to excessive spending.

False

T or F Bounded ethicality has replaced the assumption of conscious choice as the best explanation for unethical behavior.

False

T or F In a competitive auction, continuing to bid after both one and one's competitors have started bidding is considered irrational escalation of commitment.

False

T or F While investors accurately estimate the past performance of the stocks in which they invest, they hold overly optimistic beliefs about these stocks' future performance.

False

Escalation of commitment is more pronounced in simultaneous decisions than in serial decisions. (T/F)

False.

After making an investment, people's estimations of its past performance become overly ___________.

optimistic

This bias is often responsible for failed Mergers & Acquisitions. A prospective CEO affected by this bias will think that he/she will be better than the CEO of the target company at creating value for the company. Which bias is it?

overplacement

In what way does overconfidence lead people to engage in active investing?

people are excessively sure that they know which direction the market is headed and that they can pick the right fund in which to invest.

Research has found that reducing the gap between the salaries of a team's highest-paid and lowest-paid members can have a _________ effect on the team's performance.

positive

________ models/analytics focus on making recommendations especially recommendations on which actions one should perform to achieve a certain objective

prescriptive

The representativeness heuristic helps us make decisions based on (pick the most accurate description)

previously-formed opinions or stereotypes

When a fund outperforms the market two years in a row, investors often neglect to consider the likelihood that this result may be due to _____________.

randomness or chance.

In the ease of recall bias, the vividness of memories derives from:

repetition, emotions, recency

John is over seven feet tall. When asked whether John is a professional basketball player or a software programmer, many people conclude that he is most likely a basketball player. This is due to a heuristic that causes people to draw conclusions based on the fact that basketball is often stereotypically associated with tall people. What is the name of this heuristic?

representativeness heuristic

How can an organization change its reward scheme to discourage the preference of impression management over high-quality decision making?

rewards should be determined by the quality of process of decisions made, and not by the results of these decisions.

Any loss from an initial investment will systematically encourage an individual to continue the previously selected course of action, due to the human tendency to be risk-_________ in negatively framed problems.

seeking

Bounded awareness in groups (groupthink) means that groups have a tendency to focus on _________ information, at the expense of _____________ information.

shared; unique

Cain, Loewenstein, and Moore (2005) argue that auditors may be blind to changes made in corporate accounting practices as long as the changes are made slowly. This is an instance of:

slippery slope theory

The _____________ bias makes people resistant to change and drives them to prefer investment strategies that they have used in the past over searching for better strategies.

status-quo

When choosing whether or not to continue pursuing a selected course of action, previous commitments and spent resources should be regarded as ____________ .

sunk costs.

What is important to remember when formulating a fair offer in an interpersonal context?

that other people have different standards about what is fair.

What is altruistic about altruistic punishment?

that people are willing to pay money in order to punish others whom they observe behaving unfairly, even when there is no direct benefit from punishment.

When people are doing favors for their friends, what aspect of their unfair behavior do they often overlook?

that these favors cause harm for out-group members.

Which aspect of bounded awareness has major implications for ethical decision making?

the "slippery slope" theory

When firms offer their employees a choice of investment options for retirement accounts, the percentage of dollars employees choose to invest in stocks in highly correlated with what?

the percentage of stock funds offered.

How do the want and should selves interact in the decision whether to punish someone who is behaving unfairly?

the want self is driven by the feeling of anger and motivates the individual to punish. The should self makes the calculation of whether or not punishment is in the person's best interest.

Why, according to the chapter, do investors fail to compare their investment decisions to the overall market performance?

this is because investors want to justify their past behaviors and protect their overly optimistic views of their investments.

What change does the chapter offer to make in 401(k) savings plans in order to raise their enrollment rates?

to implement an automatic enrollment scheme with an opt-out option, instead of an opt-in option.

In a remarkable example of the ease of recall bias, evaluations of employee performance by managers have been shown to be affected by how close to the manager an employee sits.

true

The fact that the benefits of saving for retirement occur only in the distant future makes it easy for the _______ _______ to dominate people's decisions and to cause them to save less.

want self

Frequently seeing ads of a product tends to make people become convinced that the product is a high quality one. This is an example of which bias?

Ease of recall bias

According to the definition, the ease of recall bias is "the tendency to estimate likelihood/frequency/truth based on ______________"

The vividness or recency of memories

What prevents people from noticing or focusing on useful, observable and relevant data?

Bounded awareness

How was the effect of fairness considerations demonstrated in the dictator game?

In the dictator game, an offer made is automatically accepted. Nevertheless, most players still choose to give the other party some portion of the resources.

The statement "a phenomenon in which an individual fails to perceive an unexpected stimulus that is in plain sight" is a description of:

Inattentional blindness

A taxi is involved in a hit-and-run accident. A witness claims that it was a green taxi. Of the two companies in town, the green company owns 10% of taxis, while the blue company owns 90% of taxis. Later experiments in comparable lighting conditions show that the witness is 80% accurate in telling the color of a taxi. The police concludes that a green taxi was the most likely cause the accident. The conclusion is:

Irrational, because it does not take into account the much higher percentage of blue taxis in town compared to green taxis

Researchers of bounded ethicality claim that the primary flaw of most ethical training is that:

It focuses too narrowly on explicitly unethical behavior.

When Samuelson and Zeckhauser (1988) offered their participants to allocate their inheritance money between different options, participants displayed a consistent preference to invest in:

The same manner the money was previously invested.

The basic advantage of index funds over actively managed mutual funds is that:

Their operating fees are lower.

What is rationality?

a way to characterize intelligence precisely

Businesses that adjust their prices upward in response to high demand, consistent with economic laws of supply and demand, can experience which of the following outcomes:

a. Underperform other businesses that consider the norms of fairness. b. Are punished by customers who are more sensitive to fairness than to economic rationality. c. Make larger profit than businesses that comply with norms of fairness.

A department manager has personally decided to hire a new employee. This employee's performance, however, proves to be below expectations. Nevertheless, the manager decides to keep the employee, explaining away his current performance as merely part of the learning process. This escalation of commitment may be due to:

all of the above a. Perceptual biases. b. Judgmental biases. c. Impression management.

Inner city crime in the U.S. gets considerable media coverage, to the point that nearly every episode is reported in the news. This repetition leads people to conclude that the frequency of deaths due to homicides is higher than it actually is. Which heuristic is mainly responsible for this conclusion?

availability heuristic

The "tendency to search for, interpret or recall information that confirms our hypotheses" is called:

confirmation heuristic

Drake was forced by senior management to hire a candidate he did not like. In preparing a performance evaluation at the end of the candidate's trial period, Drake seems to have been very meticulous in finding all of the flaws in the candidate's performance, while paying little attention to the positives. Picking-and-choosing evidence in this manner is typical of:

confirmation trap