32. Projection bias:
D. All of these are true about project bias.
33. The belief that if you paid more for something it must be more valuable to you is known
as:
D. narrow framing.
34. The hot-hand fallacy:
D. is the belief that if an event has never occurred, it is more likely to occur.
35. The gambler’s fallacy:
D. is the belief that if an event has never occurred, it is more likely to occur.
36. Gabby flips a fair coin and it shows heads. When trying to guess what the coin will show
on the next flip, Gabby guesses heads because she thinks it is more likely to occur than tails since
the coin showed heads on the last flip. Gabby suffers from the:
A. gambler’s fallacy.
37. Gabby flips a fair coin and it comes up heads. Gabby suffers from the hot-hand fallacy if:
D. she thinks the coin is equally likely to come up heads or tails on the next flip.
38. Gabby flips a fair coin and it comes up heads. Gabby suffers from the gambler’s fallacy if:
A. she thinks the coin will come up heads on the next flip because it came up heads on the
previous flip.
39. Lily wants to invest in the stock market. She notices that the share price for Widgets Inc.
has been falling for weeks. She chooses to invest in Widgets Inc. because she assumes it is due
for a rebound. Lily suffers from:
D. the sunk cost fallacy.
40. Lily wants to invest in the stock market. She notices that the share price for Great Flowers
Inc. has been rising for weeks. She chooses to invest in Great Flowers Inc. because she assumes
it will continue to rise purely because of the run it has been on. Lily suffers from:
D. the sunk cost fallacy.
41. Suppose Hillary was offered the following choice: Option 1 is to win $10 for sure and
Option 2 is to win $20,000 with odds of 1 in 2,000 and otherwise to win nothing. If Hillary is risk
averse she:
D. will choose Option 1 or Option 2 with equal probability.
42. Suppose Hillary was offered the following choice: Option 1 is to win $10 for sure and
Option 2 is to win $20,000 with odds of 1 in 2,000 and otherwise to win nothing. If Hillary is risk
loving she:
D. will choose Option 1 or Option 2 with equal probability.
43. Prospect theory:
D. gave puzzling results with respect to risky decisions and was improved by John Nash’s
expected utility theory.
44. Prospect theory was proposed by:
D. Gary Becker.
45. Loss aversion occurs when:
D. the consumer’s valuation of an outcome is less sensitive, per dollar, to small losses than to
large gains.
46. The principle of diminishing sensitivity holds that:
D. the total impact of enlarging a change from the status quo increases with the size of the
change.
47. Which of the following is NOT among the statements that critics of prospect theory have
made about it?
A. It is not necessary, since expected utility theory accounts rather well for most risky choices.
48. In a voluntary contribution game:
A. each member of a group makes a contribution to a common pool which benefits only the
contributor, and this leads to alignment of individual and collective interests.
49. Social motives include all of the following EXCEPT:
A. altruism.
50. In the dictator game:
D. one player (the dictator) must give all of a fixed prize to another player (the recipient) who is a
passive participant.
51. In the ultimatum game:
D. is a single-stage game where one player (the proposal) divides a fixed prize between himself
and another player (the recipient) who is an passive participant.
52. Game theory tells us that in the ultimatum game:
D. the threat to reject in not credible, but still is expected to increase the amount given.
53. Choices made in the ultimatum game suggest:
D. that offering an ultimatum is usually a bad strategy.
54. Game theory suggests that in the trust game:
D. trustees will be trustworthy, but will forego potentially profitable investments.
55. The experimental results of the voluntary contribution game that contradict the
predictions of game theory:
A. prove that game theory is wrong.
Essay Questions
56. Suppose Dean has season tickets for the University of North Carolina men’s basketball
games. He paid $2,000 for the season tickets. One February afternoon, Dean is very excited about
going to the UNC vs. Duke game because of the traditional rivalry between the two teams.
Unfortunately, his wife invited several friends over for an evening dinner party and tells Dean he
needs to stay home and help her clean the house in preparation for the guests. Dean very much
wants to go to the game, but knows he will have to face the wrath of his wife if he does. In his
defense, Dean states “I already paid for the game! I have to go or it will be a waste of money.”
Explain why Dean’s reasoning is incorrect.
57. The faculty of Mistaken University is voting on a curricular reform. Members of the faulty
have been working on the proposed curriculum for over four years. Some faculty members are
going to vote for the reform because so much time and money has already been invested in it.
Explain why these faculty members are mistaken in their reasoning.