Perception and Decision Making

Question 1

System 1 type of thinking

Answer 1

intuitive, automatic, fast and often unconscious

Question 2

System 2 type of thinking

Answer 2

Deliberate, effortful, slow and controlled

Question 3

Prospect theory provides us with?

Answer 3

subjective value function

Question 4

Prospect theory value is segmented into?

Answer 4

gains and losses relative to a reference point

Question 5

Examples of prospect theory

Answer 5

Diminishing activity or loss aversion

Question 6

Loss aversion means

Answer 6

losses loom larger than gains

Question 7

Prospect theory processes would include

Answer 7

reference dependence, loss aversion and diminishing sensitivity

Question 8

Implications of prospect theory would include

Answer 8

endowment effect and mental accounting

Question 9

Endowment effect

Answer 9

people value something more once they own it

Question 10

Mental accounting

Answer 10

set of cognitive operations to categorize, evaluate and keep track of financial activities

Question 11

Heuristics

Answer 11

Quick rules of thumb

Question 12

Bias

Answer 12

Applying heuristics inappropriately

Question 13

Anchoring or adjustment

Answer 13

people make estimates or decisions starting from an initial value, the anchor, and adjust based on new information

Question 14

Availability heuristic

Answer 14

readily available events in memory affect the judgment of frequency

Question 15

Representative Heuristic

Answer 15

The belief that even small samples should be representative of the population. People also think that the recent past is indicative of the future. “Gamblers Fallacy”

Question 16

Flavors of Representativeness

Answer 16

Gamblers fallacy, excessive extrapolation, and regression to the mean

Question 17

Examples of Heuristics

Answer 17

Compromise, availability, representativeness, anchoring and affect

Question 18

Confirmation bias

Answer 18

the tendency to search for, interpret, and recall information in a way that confirms one’s preexisting beliefs

Question 19

Regret aversion

Answer 19

taking action and losing feels worse than doing nothing and losing

Question 20

Hindsight bias

Answer 20

People overestimate their ability to predict an outcome that could not possibly have been predicted. “I knew it all along”

Question 21

Bias examples

Answer 21

optimism, confirmation, overconfidence, regret aversion, the illusion of control and hindsight

Question 22

Risk aversion insure large or small amounts?

Answer 22

Large

Question 23

Three things said about Loss aversion

Answer 23

Small amounts of risks are aversive, framing and aggregation matters

Question 24

The sign effect

Answer 24

gains are discounted at a higher rate than losses

Question 25

Magnitude effect

Answer 25

small outcomes are discounted more than large ones

Question 26

Temporal framing effect

Answer 26

greater discounting in delay than expedite

Question 27

Resource independence

Answer 27

discounting utility or discounting different resources differently

Question 28

Discounting time

Answer 28

Individuals perceive more slack in the future than in the present, creating high discount rates for time

Question 29

Discounting money

Answer 29

individuals perceive more equal slack in future and in present creating low discount rates for money