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behavioral economics

Questions and Answers of Behavioral Economics

Roulette A roulette wheel has slots numbered 0, 00, 1, 2, 3, …, 36 (see Figure 6.5). The players make their bets, the croupier spins the wheel, and depending on the outcome, payouts may or may not
Expected value For the following questions, refer to Figure 6.3(c). (a) What is the expected value of accepting this gamble? (b) What is the expected value of rejecting it?
Lotto 6/49 Represent the gamble accepted by someone who plays Lotto 6/49 (from Exercise 4.28 on page 85) as in Figure 6.2(a) and (b).Assume that the grand prize is a million dollars.
Rational choice under uncertainty This exercise refers to the util ity matrix of Table 6.2. What course of action would be favored by (a) the maxi min criterion, (b) the maximax criterion, and (c)
The watch Having just bought a brand new watch, you are asked if you also want the optional life-time warranty.(a) Would a maximin reasoner purchase the warranty?(b) What about a maximax reasoner?
Match each of the vignettes below with one of the fol lowing phenomena: availability bias, base-rate neglect, confirmation bias, conjunction fallacy, disjunction fallacy, hindsight bias, and
Schumpeter The Austrian economist Joseph Schumpeter claimed that he had set himself three goals in life: to be the greatest econ omist in the world, the best horseman in all of Austria, and the
Genetically modified organisms (GMOs) A person opposed to GMOs reads a compelling text about the benefits of such organisms and comes to quite like the thought of them. When asked about the risks, he
Matthew Which heuristic is embodied in this line from Matthew 7:17–18: “So every good tree bears good fruit, but the bad tree bears bad fruit. A good tree cannot produce bad fruit, nor can a bad
Theories, theories Complete this sentence: “If all your observations support your scientific theories or political views, you are(probably) suffering…”
Juan Williams In October 2010, National Public Radio(NPR) fired commentator Juan Williams after he made the following remark on Fox News: “When I get on a plane … if I see people who are in
CIA Intelligence services are deeply interested in how peo ple think, both when they think correctly and when they think incorrectly.The following exercise is borrowed from the book Psychology of
Mandatory drug testing In July 2011, the state of Florida started testing all welfare recipients for the use of illegal drugs. Statistics suggest that some 8 percent of adult Floridians use illegal
IVF In vitro fertilization (IVF) is a procedure by which egg cells are fertilized by sperm outside the womb. Let us assume that any time the procedure is performed the probability of success (meaning
Gender discrimination, cont. In Exercise 4.51 on page 95, we computed the probability that an editorial board of 20 members is all male by chance alone. If the answer strikes a person as low, what
Probability matching Imagine that your friend Anne has a coin that has a 2/3 probability of coming up heads (H) and a 1/3 prob ability of coming up tails (T). She intends to flip it three times and
Misguided criticism Some critics of the heuristics-and-biases program attack it for saying that human beings are irredeemably stupid. Thus, “the heuristics-and-biases view of human irrationality
Adam Smith, once more What sort of phenomenon might Adam Smith have had in mind when he talked about the “over-weening con ceit which the greater part of men have of their own abilities”?
Inevitability People think many things are inevitable. If you search for the expression “it was inevitable that” on Google News, you may get more than ten thousands hits. Which bias is reflected
Meteorology Evidence suggests meteorologists are well cali brated and therefore an exception to the rule. This will strike many people as literally unbelievable. What heuristic might cause them to
Contacts Your optometrist tells you that your new contacts are so good that you can wear them night and day for up to 30 days straight. She warns you that there is some chance that you will develop
CT scans In some populations, brain tumors in children are rare: the base rate is only about 1/10,000. A child with a tumor is very likely to have occasional headaches: 99 out of 100 do. But there
Destroying America Explain how book titles such as Demonic: How the Liberal Mob Is Endangering America and American Fascists: The Christian Right and the War on America contribute to political
Reputation The fact that people exhibit confirmation bias makes it very important to manage your reputation – whether you are a stu dent, professor, doctor, lawyer, or brand. Why?Scientists, by the
Confirmation bias Imagine that John is suffering from confir mation bias. Which of the curves labeled A, B, and C in Figure 5.4 best repre sents the manner in which his probabilities change over time
Diagnosticity Let us take it for granted that the behavior detection test (from Exercise 5.26) is not diagnostic. The test may still be diagnostic in another setting, say, at a checkpoint at the US
Behavior detection The following passage is from USA Today:Doug Kinsey stands near the security line at Dulles International Airport, watching the passing crowd in silence. Suddenly, his eyes lock on
Jean Charles de Menezes In the aftermath of the July 21, 2005, terrorist attacks in London, British police received the authority to shoot terrorism suspects on sight. On July 22, plainclothes police
Down syndrome The probability of having a baby with Down syndrome increases with the age of the mother. Suppose that the following is true. For women 34 and younger, about one baby in 1000 is
Iron Bowl At an Auburn–Alabama game, 80 percent of attend ees wore Alabama gear and 20 percent wore Auburn gear. During the game, one of the attendees apparently robbed a beer stand outside the
Testimony A cab company was involved in a hit-and-run acci dent at night. Two cab companies, the Green and the Blue, operate in the city.You are given the following data: 85 percent of the cabs in
Mammograms, cont. Men can get breast cancer too, although this is very unusual. Using the language of “base rates” and “diagnosticity,”explain why men are not routinely tested for breast
Private jet shopping Suppose you are fortunate (or delu sional) enough to be shopping for a private jet. You have to decide whether to get a jet with one or two engines. Use p to denote the
The preface paradox In the preface to your new book, you write that you are convinced that every sentence in your book is true. Yet you recognize that for each sentence there is a 1 percent chance
The birthday problem Suppose that there are 30 students in your behavioral economics class. What is the probability that no two students have the same birthday? To make things easier, assume that
What is the probability of drawing at least one ace when drawing cards from an ordinary deck, with replacement, when you draw:(a) 1 card, (b) 2 cards, (c) 10 cards, and (d) 52 cards?
Terrorism Compute the probability that at least one major ter rorist attack occurs over the course of the next ten years, given that there are 365.25 days in an average year, if the probability of an
Flooding Imagine that you live in an area where floods occur on average every ten years. The probability of a flood in your area is constant from year to year. You are considering whether to live in
Hiking You plan to go on a hike in spite of the fact that a tor nado watch is in effect. The national weather service tells you that for every hour in your area, there is a 30 percent chance that a
Mr Langford, cont. Suppose that Langford from Exercise 4.49 on pages 94–95 has just won two jackpots in a row and is about to play a third time. What is the probability that he will win a third
Let us assume that whenever one gets pregnant, there is a 1/100 chance of having twins, and that being pregnant with twins once will not affect the probability of being pregnant with twins later.(a)
Representativeness Which of the following two outcomes will strike people who use the representativeness heuristic as more likely: getting 4-3-6-2-1 or 6-6-6-6-6 when rolling five dice?
Gambler’s fallacy Carefully note the difference between the following two questions:(a) You intend to flip a fair coin eight times. What is the probability that you end up with eight heads?(b) You
Threes “Bad things always happen in threes,” people some times say, pointing to evidence such as the fact that Janis Joplin, Jimi Hendrix and Jim Morrison all died within a few months of each
Winners Purveyors of lottery tickets are fond of posting signs such as that in Figure 5.1. Of the two mistakes we have identified in this sec tion, which one are they hoping you will make today?
The alarms Knowing that alarm clocks sometimes fail to go off, some people set multiple alarms to make sure they will wake up in the morning.(a) In order to work as intended, should the different
The eggs and the basket Use the concept of independence to explain why you should not put all of your eggs in one basket.
Pregnancy tests You are marketing a new line of preg nancy tests. The test is simple. You flip a fair coin. If the coin comes up heads, you report that the customer is pregnant. If the coin comes up
Max’s bad day Max is about to take a multiple-choice test. The test has ten questions, and each has two possible answers:“true” and “false.” Max does not have the faintest idea of what the
Gov. Schwarzenegger After vetoing a bill from the Cali fornia State Assembly in 2009, California Governor Arnold Schwarzenegger published a letter (see Figure 4.6). People immediately noticed that
Softball A softball player’s batting average is defined as the ratio of hits to at bats. Suppose that a player has a 0.250 batting average and is very consistent, so that the probability of a hit
Gender discrimination Imagine that an editorial board of 20 members is all male.(a) What is the probability that this would happen by chance alone assuming that the board members are drawn from a
Economists go to Vegas According to professional lore, economists are not welcome to organize large meetings in Las Vegas.The reason is a sort of sin of omission. What is it economists, unlike most
Mr Langford Multiple lawsuits allege that area gam bling establishments, on multiple occasions, doctored equipment so as to give Birmingham mayor Larry Langford tens of thousands of dol lars in
Bayesian updating, cont. Suppose that, on the third trial, instead of flipping heads, the student flips tails. What would John’s and Wes’s posterior probability be? To solve this problem, let E
Bayesian updating Suppose Wes, before the student starts flipping the coin, assigns a probability of 50 percent to the hypothesis that it has two heads.(a) What is his posterior probability after the
The dating game You are considering asking L out for a date, but you are a little worried that L may already have started dating somebody else. The probability that L is dating somebody else, you
Scuba diving certification, cont. You passed the scuba diving test! Your friend says: “Not to rain on your parade, but you obviously got the easy test.” Given that you passed, what is the
Cancer, cont. Suppose that your patient from Exercise 4.40 dies in less than one year, before you learn whether he or she has type A or type B cancer. Given that the patient died in less than a year,
Scuba diving certification You are scheduled to sit the test required to be a certified scuba diver and very much hope you will pass (P).The test can be easy (E) or not. The probability that it is
Cancer Use the rule of total probability to solve the following problem. You are a physician meeting with a patient who has just been diag nosed with cancer. You know there are two mutually exclusive
The general and rule Use the general and rule to compute the probability that you will draw the ace of spades twice when drawing two cards from a deck without replacement.The general and rule permits
Ace of spades Use Definition 4.32 to compute the probability that you draw an ace of spades conditional on having drawn an ace when you draw one card from a well-shuffled deck. You can imagine a game
Conditional Probabilities Suppose that H means “The patient has a headache” and T means “The patient has a brain tumor.”(a) How do you interpret the two conditional probabilities Pr (H 0 T)
Lotto 6/49, cont. Use the idea of anchoring and adjustment from Section 3.6 to explain why people believe that they have a good chance of winning these lotteries.
Lotto 6/49 Many states and countries operate lotteries in which the customer picks n of m numbers, in any order, where n is consider ably smaller than m. In one version of this lottery, which I will
In computing the answer to Exercise 4.26(d), you may have been tempted to add the probability of rolling a six on the one die (1/6) to the probability of rolling a six on the other die (1/6) to get
For the following questions, assume that you are rolling two fair dice:(a) What is the probability of getting two sixes?(b) What is the probability of getting no sixes?(c) What is the probability of
Suppose you draw two cards from a well-shuffled deck of cards with replacement, meaning that you put the first card back into the deck(and shuffle the deck once more) before drawing the second
When rolling two fair dice, what is the probability that the number of dots add up to 11? If you intend to use the or rule, make sure the relevant outcomes are mutually exclusive. If you intend to
Luck in love According to a well-known saying: “Lucky in cards, unlucky in love.” Is this to say that luck in cards and luck in love are independent or not independent?
Independence What pairs of outcomes are independent?More than one answer may be correct.(a) You sleep late; you are late for class.(b) You are a remarkable student; you get a good job after
Are you more likely to get two sixes when rolling one fair die twice or when simultaneously rolling two fair dice?Notice that the and rule requires that the two outcomes be independent.What does this
What is the probability of drawing an ace when drawing one card from a regular (well-shuffled) deck of cards? If you intend to apply the or rule, do not forget to check that the relevant outcomes are
Mutual exclusivity Which pairs of outcomes are mutually exclusive? More than one answer may be correct.(a) It is your birthday; you have a test.(b) It rains; night falls.(c) You get Bs in all of your
The Monty Hall Problem You are on a game show. The host gives you the choice of three doors, all of which are closed. Behind one door there is a car; behind the others are goats. Here is what will
Four-card swindle Your other friend Bull has another deck of cards. This deck has four cards: one card is white on both sides; one card is black on both sides; one card is red on both sides; and one
Three-card swindle Your friend Bill is showing you his new deck of cards. The deck consists of only three cards. The first card is white on both sides. The second card is red on both sides. The third
Mr Peters’s children Your other neighbor, Mr Peters, has three children. Having just moved to the neighborhood, you do not know whether the children are boys or girls. Let us assume that every time
Mrs Jones’s children, cont. Instead of telling you that at least one of the children is a girl, Mrs Jones tells you that her oldest child is a girl.Now, what is the probability that the other child
The Large Hadron Collider According to some critics, the Large Hadron Collider has a 50 percent chance of destroying the world. In an inter view with the Daily Show’s John Oliver on April 30, 2009,
Suppose that you are drawing one card each from two thor oughly shuffled but otherwise normal decks of cards. What is the probability that you draw the same card from the two decks?You could answer
what is economics
Match each of the vignettes below with one of the fol lowing phenomena: anchoring and adjustment, compromise effect, failure to consider opportunity costs, loss aversion, and sunk-cost fallacy. If in
Seneca What phenomenon might Seneca have had in mind when he wrote the following? “Let us turn now to inheritances, the greatest cause of human distress; for should you compare all the other ills
W. E. B. Du Bois The great African–American scholar and activist W. E. B. Du Bois said: “The most important thing to remember is this: To be ready at any moment to give up what you are for what
Larry and Janet Larry and Janet are loss averse: their value function is v(x) 5 x/3 for gains and v(x) 5 3x for losses. The two hold stock in the same company. They bought it yesterday, when the
Tim and Bill Tim and Bill are addicted to Apple products.They are looking at the new iPhone at a store that offers a no-questions-asked return policy. They are not sure the new features are worth it.
Pear Corporation The Pear computer company is intro ducing a new line of tablet computers. The Macro has huge storage capacity but is not very affordable. The Micro has limited storage capac ity but
Mr Humphryes The following quotation is from a 2009 news story titled “Tension builds around courthouses’ reopening.” The controversy concerns whether to reopen a satellite courthouse in a
Does money buy happiness? Research by economists Betsey Stevenson and Justin Wolfers finds that the marginal happiness of money is positive (though sharply diminishing) at all levels of income.This
AEA The following question was famously asked of 200 professional economists at the 2005 meeting of the American Economic Association (AEA). By looking up the answer in the answer key, you can
Toasters Suppose that you wanted to sell toasters for $160, which will strike customers like a lot. How does research on anchoring and adjustment suggest that you do it?
Invention of chess According to legend, the inventor of chess was asked by the emperor what he (the inventor) wanted in return for his invention. The inventor responded: “One grain of rice for the
Milton and Rose Friedman Nobel laureate Milton Friedman and Rose Friedman famously wrote: “Nothing is so permanent as a temporary government program.” (a) Use the concept of loss aversion to
Affordable Care Act Writing in the Washington Examiner in July of 2013, Byron York explained why Democrats were so eager to imple ment the Affordable Care Act, a.k.a. Obamacare, which aims to provide
Health care Broadly speaking, in Europe, health care is pro vided by the government and paid for by taxes. That is, individuals are taxed by the government, which then uses the tax money to provide
Value functions Suppose that you are loss averse, and that your value function is v (x) 5 x for gains and v (x) 5 3x for losses. (a) Represent the value function graphically, in the manner of Figure
Salary comparisons Insofar as you use other people’s salaries as a reference point, what does value theory seem to say about maximizing value in your life?
Exam scores Assume that Alysha and Billy have the follow ing value function over exam scores: v (x) 5 x/2 for gains and v (x) 5 2x for losses. Both of them use the expected exam score as their

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