Lecture 2

Question 1

Which one of the following statements are correct about bounded rationality?

A) humans have inherent cognitive limitations
B) when we are met with situations of high uncertainty and complexity, we rely often on heuristics
C) bounded rationality results in decisions and outcomes deviating from the optimum
D) heuristics refers to intuition, rule of thumbs, etc.
E) biases refers to decision-making errors
F) all of the above

Answer 1

F) all of the above

Question 2

Of the common biases, which of the following refers to when losses are felt more acutely than gains of the same amount, thus reinforcing risk-aversion?
A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 2

D) Loss aversion: when losses are felt more acutely than gains of the same amount, thus reinforcing risk-aversion.
More specifically, this refers to the fact that people feel twice as bad about incurring a loss as they feel good about receiving a gain of the same amount.

Question 3

Of the common biases, which of the following refers to when investing additional resources in an apparently losing proposition b/c of what has already been invested?

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 3

A) Escalation of commitment: investing additional resources in an apparently losing proposition b/c of what we already invested.

Question 4

Of the common biases, which of the following refers to when one places too much weight on evidence consistent with favoured belief?

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 4

B) Confirmation bias: place too much weight on evidence consistent with favoured belief

Question 5

Of the common biases, which of the following refers to when we assume others know what we do?

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 5

E) Knowledge-biases: we assume others know what we do

Question 6

Of the common biases, which of the following refers to when we overestimate the probability of positive events, and underestimate the probability of negative events?

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 6

F) Excessive optimism: when we overestimate the probability of positive events, and underestimate the probability of negative events

Question 7

Of the common biases, which of the following refers to when conformity-seeking make us disregard alternatives?

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 7

C) Groupthink: conformity-seeking makes us disregard alternatives

Question 8

Of the common biases, which of the following refers to when we prefer the current state of a situation?

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 8

H) Status quo bias: we prefer the current state of a situation

Question 9

Of the common biases, which of the following refers to when we overestimate our skill level relative to others, how much we contributed to joint efforts and our contribution to positive outcomes?

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 9

G) Self-serving bias: we overestimate our skill level relative to others, how much we contributed to joint efforts and our contribution to positive outcomes

Question 10

Of the common biases, which of the following refers to when we value immediate rewards very highly, but undervalue long-term gains?

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 10

I) Present bias: value immediate rewards very highly, but undervalue long-term gains

Question 11

Of the common biases, which of the following refers to when we ascribe more value to things when we own them

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 11

J) The endowment effect: we ascribe more value to things when we own them

Question 12

Which of the following common biases are related to framing of alternatives? (Multiple options may be correct)

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 12

A) Escalation of commitment
D) Loss aversion

Question 13

Which of the following common biases are related to perceiving and judging alternatives? (Multiple options may be correct)

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 13

B) Confirmation bias
C) Groupthink
E) Knowledge-biases

Question 14

Which of the following common biases are action-oriented biases? (Multiple options may be correct)

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 14

F) Excessive optimism
G) Self-serving biases

Question 15

Which of the following common biases are stability biases? (Multiple options may be correct)

A) Escalation of commitment
B) Confirmation bias
C) Groupthink
D) Loss aversion
E) Knowledge-biases
F) Excessive optimism
G) Self-serving biases
H) Status quo bias
I) Present bias
J) The endowment effect

Answer 15

H) Status quo bias
I) Present bias
J) The endowment effect

Question 16

Rationality refers to the ratio between the cognitive capacities of the decision-maker and the complexity of the problem.
Which of the following statements is/are true about COMPLETE RATIONALITY? (Multiple options may be correct)

A) behaviour is intendedly rational, but only limited so
B) the ratio of cognitive capacities of the decision-maker to the complexity of the problem is 1
C) the decision is able to fully grasp and solve a problem immediately without problems
D) it is only possible to reach complete rationality when problems are simple and in situations where adjustments are quick

Answer 16

WRONG: A) behaviour is intendedly rational, but only limited so

CORRECT:
B) the ratio of cognitive capacities of the decision-maker to the complexity of the problem is 1
C) the decision is able to fully grasp and solve a problem immediately without problems
D) it is only possible to reach complete rationality when problems are simple and in situations where adjustments are quick

Question 17

Rationality refers to the ratio between the cognitive capacities of the decision-maker and the complexity of the problem.
Which of the following statements is/are true about LIMITED RATIONALITY? (Multiple options may be correct)

A) cognitive capacities of the decision-maker are insufficient to grasp the whole complexity of a problem
B) the ratio of the cognitive capacities of the decision-maker to the complexity of the problem is less than 1
C) it is not possible to take all relevant aspects of a problem into account
D) behaviour is intendedly rational but only limited so
E) can be due to limited resources, resulting in making the optimal decision being too costly

Answer 17

All options are correct:

A) cognitive capacities of the decision-maker are insufficient to grasp the whole complexity of a problem
B) the ratio of the cognitive capacities of the decision-maker to the complexity of the problem is less than 1
C) it is not possible to take all relevant aspects of a problem into account
D) behaviour is intendedly rational but only limited so
E) can be due to limited resources, resulting in making the optimal decision being too costly

Question 18

Rationality refers to the ratio between the cognitive capacities of the decision-maker and the complexity of the problem.
Which of the following statements is/are true about PROCEDURAL RATIONALITY? (Multiple options may be correct)

A) is relevant when the complexity is many times larger than the cognitive capacities of the decision-maker (ratio of cognitive capacities of the decision-maker to the complexity of the problem is close to 0)
B) people’s behaviour is typically governed by rule of thumb rather than trying to figure things out
C) this is almost never the case, since procedural rationality applies to specific and extraordinary situations of immensely high complexity
D) procedural rationality is relevant in environments where the speed of adjustment is low

Answer 18

WRONG: C) this is almost never the case, since procedural rationality applies to specific and extraordinary situations of immensely high complexity

CORRECT:
A) is relevant when the complexity is many times larger than the cognitive capacities of the decision-maker (ratio of cognitive capacities of the decision-maker to the complexity of the problem is close to 0)
B) people’s behaviour is typically governed by rule of thumb rather than trying to figure things out
D) procedural rationality is relevant in environments where the speed of adjustment is low

Question 19

Three kinds of behavioural hypotheses exist. Which of the following statements are NOT TRUE about self-interested behaviour?

A) reflects people who care bout their own interest
B) reflects people who are honest and reliable - they keep promises, stick to the rules, and do not misrepresent information
C) reflects people who strive for the common interest and take decisions in the interest of the organization as a whole
D) reflects people who use all means to advance own situation and gain benefits (lying, stealing, treason

Answer 19

WRONG:
C) reflects people who strive for the common interest and take decisions in the interest of the organization as a whole (idealistic behaviour)

D) reflects people who use all means to advance own situation and gain benefits (lying, stealing, treason (opportunistic behaviour)

Question 20

Three kinds of behavioural hypotheses exist. Which of the following statements are NOT TRUE about opportunistic behaviour?

A) reflects people who care bout their own interest
B) reflects people who are honest and reliable - they keep promises, stick to the rules, and do not misrepresent information
C) reflects people who use all means to advance own situation and gain benefits (lying, stealing, treason)
D) reflects people who may resort to subtle forms of dishonesty (telling only part of the truth, presenting overoptimistic view, etc.)

Answer 20

WRONG:
B) reflects people who are honest and reliable - they keep promises, stick to the rules, and do not misrepresent information (self-interested behaviour)

Question 21

Three kinds of behavioural hypotheses exist. Which of the following statements are NOT TRUE about idealistic behaviour?

A) reflects people who care bout their own interest
B) reflects people who strive for the common interest and take decisions in the interest of the organization as a whole
C) reflects people who use all means to advance own situation and gain benefits (lying, stealing, treason)
D) reflects people who may resort to subtle forms of dishonesty (telling only part of the truth, presenting overoptimistic view, etc.)

Answer 21

WRONG:
A) reflects people who care bout their own interest (self-interested behaviour or opportunistic behaviour)
C) reflects people who use all means to advance own situation and gain benefits (lying, stealing, treason) (opporunistic behaviour)
D) reflects people who may resort to subtle forms of dishonesty (telling only part of the truth, presenting overoptimistic view, etc.) (opporunistic behaviour)

Question 22

Two organizational problems are at the center of attention in the ToF main book - which of the following are not one of these?
A) game theory
B) motivation problems
C) agency theory
D) coordination problems

Answer 22

WRONG: game theory and agency theory are two important concepts of the course, but not by definition the “center of attention”.

Correct answer:
B) Motivation problems: conflicting/ diverging interests between players. They often occur in situations where something has to be divided, and one person’s gain is at the expense of the other
D) Coordination problems: characterized by the common or joint interest of players – the issue is how to enlarge the pie

Question 23

Following is a definition of a certain concept - choose which

“____ is geared towards predicting what will happen/ the outcome of a game, where each player takes into account the actions and reactions of the other player”
A) efficiency
B) pareto-efficient equilibrium
C) equilibrium
D) Nash equilibrium

Answer 23

(C) EQUILIBRIUM is geared towards predicting what will happen/ the outcome of a game, where each player takes into account the actions and reactions of the other player

Question 24

Following is a definition of a certain concept - choose which

“____ is frequently used to measure the sum of the consumer and producer surplus. ____ reflects a state where the sum of the consumer and producer surplus is maximized”
A) efficiency
B) pareto-efficient equilibrium
C) equilibrium
D) Nash equilibrium

Answer 24

“(A) EFFICIENCY is frequently used to measure the sum of the consumer and producer surplus. EFFICIENT ALLOCATION reflects a state where the sum of the consumer and producer surplus is maximized”

Question 25

Following is a definition of a certain concept - choose which

“____ refers to a state where no other allocation is available that improves the well-being of one player without decreasing the well-being of others.”
A) efficiency
B) pareto-efficient equilibrium
C) equilibrium
D) Nash equilibrium

Answer 25

“(B) PARETO-EFFICIENT EQUILIBRIUM refers to a state where no other allocation is available that improves the well-being of one player without decreasing the well-being of others.”

Question 26

Following is a definition of a certain concept - choose which

“____ refers to a situation in which nobody can change their decisions such that their wellbeing is improved. In general, this means that a player’s choice should not harm his own interest (rational behaviour)”
A) efficiency
B) pareto-efficient equilibrium
C) equilibrium
D) Nash equilibrium

Answer 26

“(D) NASH EQUILIBRIUM refers to a situation in which nobody can change their decisions such that their wellbeing is improved. In general, this means that a player’s choice should not harm his own interest (rational behaviour)”

Question 27

Following statement is NOT TRUE about Nash equilibrium
A) refers to a situation where nobody can change their decision such that their wellbeing is improved
B) it specifies a payoff-maximizing strategy for each player, given the choice of strategy of the other players
C) in a strategic form (matrix game), the Nash equilibrium strategies are located in those cells where there is no departing arrow - players have no incentive to deviate
D) Non-credible threats/ strategies can be a subgame perfect equilibrium strategy
E) There can be multiple Nash equilibria, which is often the case in dynamic games with multiple periods
F) Multiple Nash equilibria reduces the predictive power of the Nash equilibrium concept

Answer 27

WRONG:
D) Non-credible threats/ strategies can be a subgame perfect equilibrium strategy

Non-credible threats/ strategies: cannot be subgame perfect equilibrium strategies. The concept entails a criterion by which it can be determined which policy proposals are credible

Question 28

Which of the following statements are NOT TRUE with respect to information implications on equilibrium?

A) an equilibrium with asymmetric information often differs from the first-best equilibrium in a situation with complete information
B) if certain information is not available, this will almost always result in loss of efficiency
C) if the available information is characterized by asymmetry, the most attractive outcome is referred to as the second-best efficient

Answer 28

All statements are true

Question 29

An equilibrium may be inefficient if players take decisions which are in their own interest but not in the common interest

Is this TRUE/ FALSE?

Answer 29

TRUE - cf. prisoners dilemma

Question 30

Which of the following is not a ingredient in game theory?
A) players
B) choice possibilities
C) equilibrium
D) payoff
E) information structure
F) rules

Answer 30

C) equilibrium is a vital concept in game theory, but not a formal ingredient as defined by the book