Additional Questions for the Final ECO23/PSY23 Fall 2015 Udayan Roy

In preparing for the final of Monday, December 14, please pay close attention to the questions in the 7 homework assignments that I gave this semester. In addition, please use the following questions to guide your preparations.

Relative Consumption and Happiness

a.i.1. Surveys have been used in several countries to measure the subjective well-being of the residents. Which of the following is true?

a.i.1.a. Both inflation-adjusted per-capita income and subjective well-being have increased steadily over time. This confirms the assumption in standard economics that consumption and happiness go hand in hand. a.i.1.b. Both inflation-adjusted per-capita income and subjective well-being have remained roughly constant over time. a.i.1.c. Although inflation-adjusted per-capita income has increased significantly over time, subjective well-being has remained roughly constant over time. a.i.1.d. Although inflation-adjusted per-capita income has remained roughly constant over time, subjective well-being has increased significantly over time.

a.i.2. The data on the behavior of inflation-adjusted per-capita income and subjective well- being over time suggest that

a.i.2.a. A person’s happiness depends on his/her own consumption, and has nothing to do with the consumption levels of other members of the community. This finding agrees with the assumptions of standard economics. a.i.2.b. A person’s happiness increases when others become richer, even if his/her own income is unchanged. This reflects our tendency to find joy in the happiness of others. a.i.2.c. A person’s happiness increases when others become poorer, and his/her own income is unchanged. This reflects the idea that we are happier, not when our own standard of living increases, but when it increases relative to that of others. a.i.2.d. The view, in (c) above, of what makes us happy is in agreement with the assumptions of standard economics.

a.i.3. Since the 1970s, several of the major advanced nations of the world have seen increases in economic inequality. If income and wealth increases sharply for the richest one percent of the people but remain unchanged for the remaining ninety-nine percent, the available survey results on subjective well-being suggest that the subjective well-being of the ninety-nine percent will

a.i.3.a. Remain unchanged, reflecting their unchanged levels of income and wealth a.i.3.b. Increase over time, reflecting their intense joy at seeing the growing prosperity of the richest one percent. a.i.3.c. Decrease over time, reflecting their unhappiness over their economic decline relative to the richest one percent. a.i.3.d. Decrease if the income and wealth of the richest one percent is redistributed to the remaining ninety-nine percent.

Persuasion and Social Pressure a.i.4. In experiments discussed in class, participants in the experiment (“estimators”) had to rely on information provided by better-informed people (“advisors”) to estimate the numbers of coins in a jar. In the first experiment, the advisors had no incentive to mislead the estimators. In the second experiment, the advisors had an incentive—known to all—to trick the estimators into stating high estimates. It was found that

a.i.4.a. The estimates from the two experiments were roughly the same. One can conclude that people ignore advice given by people who are known to have an incentive to mislead. a.i.4.b. The estimates from the second experiment were 28 percent lower. One can conclude that when advice givers are known to have an incentive to sway the opinions of the advice receivers in a particular direction, the latter over-react and do the opposite of what they are told to do. a.i.4.c. The estimates from the second experiment were 28 percent higher. One can conclude that people ignore advice given by people who are known to have an incentive to mislead. a.i.4.d. The estimates from the second experiment were 28 percent higher. One can conclude that people trust the so-called experts, even when it is known that the experts have a reason to give bad advice.

a.i.5. It is well known that financial analysts tend to be notoriously bullish (that is, they almost always tend to think that asset prices will rise) and that actual performance does not justify the bullish advice they give their clients. It has been seen that:

a.i.5.a. Both small and large investors follow the advice given by the financial advisors despite the poor record of the advice. a.i.5.b. Small investors follow the advice of the financial analysts almost literally but large investors follow a more restrained approach. a.i.5.c. Large investors follow the advice of the financial analysts almost literally but small investors follow a more restrained approach. a.i.5.d. Both small and large investors take a more restrained approach to investing than the bullish approach suggested by financial analysts because of the poor record of the bullish approach.

a.i.6. Solomon Asch’s classic experiment showed that

a.i.6.a. People tend to be independent minded. They rely on their own experiences and ignore the reported views of others in forming their own views. a.i.6.b. People rely on the stated views of others even when those views clearly contradict their own experiences. a.i.6.c. People tend to be independent minded. They will not do things that they consider cruel just because an authority figure has urged them to do so. a.i.6.d. People may go against their own conscience and inflict pain on others if they are urged by an authority figure to do so.

a.i.7. Stanley Milgram’s classic experiment showed that

a.i.7.a. People tend to be independent minded. They rely on their own experiences and ignore the reported views of others in forming their own views.

2 a.i.7.b. People rely on the stated views of others even when those views clearly contradict their own experiences. a.i.7.c. People tend to be independent minded. They will not do things that they consider cruel just because an authority figure has urged them to do so. a.i.7.d. People may go against their own conscience and inflict pain on others if they are urged by an authority figure to do so.

Behavioral Economics and the Poor

The questions in this section are based on my class discussion in the-poor.pptx of “Scarcity: Why Having Too Little Means So Much” by Sendhil Mullainathan and Eldar Shafir, 2013.

a.i.8. Mullainathan and Shafir argue that the poor are poor because

a.i.8.a. They either have few productive resources or are unlucky. The decision-making abilities of the poor are just as good as those of the rich. Consequently, their choices and decisions are no less rational than those of the rich. a.i.8.b. They are not as well equipped mentally as the rich to make good choices and decisions in daily life. It is their poor decision-making abilities that make them poor. a.i.8.c. They either have few productive resources or are unlucky, and also because the mental pressures of scarcity lead people to make bad decisions. a.i.8.d. Government policies induced them into a life of laziness and low income.

a.i.9. (Select all correct answers) Mullainathan and Shafir use the term cognitive bandwidth to refer to the ability of people

a. To think effectively about their problems b. To exercise self-control c. To be compassionate towards others d. To trust others to do what’s right

a.i.10. After World War II, a starvation experiment was conducted with volunteers. It was observed that the starving volunteers

a. Focused on food-related aspects of life b. Lost interest in aspects of life that were not food related c. Exhibited ‘focusing’ and ‘tunneling’ d. All of the above

a.i.11. According to Mullainathan and Shafir, making decisions is

a. Harder for the rich because it is harder to figure out what to do with your money when you have so much of it b. Harder for the poor because they often do not have the money for even the essentials of life. As a result, they often need to figure out which essential commodities to sacrifice so that other essential commodities could be purchased c. Harder for the poor because they are less intellectually gifted than the rich

3 d. Harder for the rich because they must constantly worry about not buying things that would make the poor jealous and resentful

a.i.12. When psychologists ran experiments in which the participants were asked to spot certain words in a grid consisting of letters of the alphabet, they found that

a.i.12.a.Hungry people took less time (than non-hungry people) to spot the words a.i.12.b.Hungry people took more time to spot the words a.i.12.c.Hungry people were quicker to spot food-related words and just as quick to spot other words a.i.12.d.Hungry people were quicker to spot food-related words and slower to spot other words a.i.12.e.Hungry people were slower to spot food-related words and just as quick to spot other words

a.i.13. According to Mullainathan and Shafir, scarcity makes us _____ at making efficient use of the thing that is scarce. This ____ aspect of scarcity is called _____.

a. Better; positive; the focus dividend b. Better; positive; the bandwidth tax c. Worse; negative; the focus dividend d. Worse; negative; the tunneling tax

a.i.14. According to Mullainathan and Shafir, when we experience scarcity, we become ____ at thinking about issues that do not directly involve the source of the scarcity. When we feel the mental pressures of scarcity, we ____ things that are important but not urgent. This aspect of scarcity is called:

a.i.14.a.Worse; ignore; tunneling a.i.14.b.Worse; ignore; focus dividend a.i.14.c.Better; focus on; tunneling a.i.14.d.Better; focus on; focus dividend

a.i.15. Mullainathan and Shafir have argued that when we face the mental pressures of scarcity, measures of our intelligence ____ and measures of our self-control _____. This phenomenon is referred to as ____.

a.i.15.a.Increase; increase; the focus dividend a.i.15.b.Increase; decrease; tunneling a.i.15.c.Decrease; decrease; the bandwidth tax a.i.15.d.Decrease; increase; the focus dividend

a.i.16. In an experiment discussed by Mullainathan and Shafir, dieters and non-dieters were asked to spot certain words in a grid of letters of the alphabet. In the first part of the experiment, the words were neutral (“street”, “tree”, “picture”, etc.). In the second part of the experiment, the odd-numbered words were replaced by food-related words (“cake”, “donuts”, etc.). Which of the following is incorrect?

a.i.16.a.In the first experiment (with all neutral words) dieters and non-dieters did equally well

4 a.i.16.b.In the second experiment (with the odd-numbered words being food-related words) dieters took longer to spot the next neutral word after spotting a food-related word a.i.16.c.In the second experiment dieters took longer to spot the next food-related word after spotting a neutral word a.i.16.d.Non-dieters did equally well in both experiments

a.i.17. In the experiments in a New Jersey mall that were discussed by Mullainathan and Shafir, rich and poor people were subjected to standard tests of intelligence and impulse control. In the first part of the experiment, the participants were asked to think about the effects on them of a $300 car-related expense before taking the tests. In the second part, the car-related expense was for $3,000. These experiments showed that the poor did ____ the rich in intelligence and ____ in impulse control when the car-related expense was ____. (Warning: Complex sentence. Take your time.)

a.i.17.a.Just as well; just as well; $300 a.i.17.b.Just as well; just as well; $3,000 a.i.17.c.Worse than; worse than; $3,000 a.i.17.d.Both (a) and (b) are true a.i.17.e.Both (a) and (c) are true

a.i.18. When the tests of intelligence and impulse control that were done in the New Jersey mall were repeated among sugarcane farmers in India, it was found that those who were tested just before the harvest did ____ (relative to those who were tested just after the sale of the harvested crop) in intelligence and ____ in impulse control, when the expense they were asked to think about before taking the tests was ____. (Warning: Complex sentence. Take your time.)

a.i.18.a.Just as well; just as well; low a.i.18.b.Just as well; just as well; high a.i.18.c.Worse than; worse than; high a.i.18.d.Both (a) and (b) are true a.i.18.e.Both (a) and (c) are true

a.i.19. According to Mullainathan and Shafir, experiments in a New Jersey mall and studies conducted on sugarcane farmers in India suggest that the mental pressures of having to deal with scarcity appear to:

a.i.19.a.Have no effect on either intelligence or impulse control a.i.19.b.Have no effect on intelligence, make us more impulsive a.i.19.c.Make us less intelligent, but have no effect on our ability to resist temptation a.i.19.d.Make us less intelligent and more impulsive

Charity Appeals

a.i.20. In an experiment by Paul Slovic that was discussed in class, one group of randomly chosen people (Group Rokia) were presented with the opportunity to donate to a starving girl named Rokia, a second group (Group Moussa) was given a similar opportunity to donate to a starving boy named Moussa, and a third group (Group Both) were presented with the opportunity to donate to two starving children named Rokia and Moussa. Slovic found that

5 a. Few people from Group Rokia and Group Moussa were willing to contribute. But those in Group Both were somewhat more generous. b. Group Rokia and Group Moussa responded enthusiastically. But the response from Group Both was truly overwhelming. c. Group Rokia and Group Moussa responded enthusiastically. But surprisingly, people were less likely to donate anything at all when they were presented with two starving children. d. All three contributed roughly the same amount.

a.i.21. According to Slovic, people who were given an appeal for donations that described Rokia’s story ______people who were given an appeal that added a statistical portrayal of the food crisis in poor countries to Rokia’s story. This implies that ______.

d.i.1.a. Donated roughly the same amount as; statistical mumbo jumbo are usually ignored by busy people d.i.1.b. Donated less than; our desire to help is primary driven by a rational weighing of facts rather than by emotions. d.i.1.c. Donated less than; people hated Rokia but were moved to give something when reminded of the larger picture of hunger in the poor countries of the world. d.i.1.d. Donated more than; our desire to help is driven primarily by our emotions, and abstract arguments may reduce the impact of an emotional story.

Cheating

a.i.22. In an experiment with Harvard Business School students, students were paid for correct answers to Jeopardy!-type trivia questions. The control group got 32.6 correct answers (out of 50) on average. For another group, the scantron or bubble sheet (on which the workbook’s answers had to be shown) already indicated the correct answers. Both the workbook and the scantron had to be given to the proctor. The results showed that

a. Harvard Business School students never cheat, not even when they have the opportunity to do so. b. the second group did significantly better than the control group. This shows that people cheat when they get a chance c. the second group did just as well as the control group. d. people cheat less when the chance of getting caught goes up

a.i.23. Continuing with the previous question, a third group of students was told to destroy their workbooks and hand over only the scantrons. A fourth group did not even have to hand over the scantrons; they only had to tell the proctor how many questions they answered correctly. The results showed that

a. the fourth group did significantly better than the third group, which did significantly better than the second group, which did significantly better than the control group. This shows that cheating increases when the chance that the cheating would be detected decreases b. the second, third, and fourth groups had very similar scores, and they all did significantly better than the control group. This shows that we cheat when we have the chance to do so, but the likelihood of cheating does not depend on the likelihood of getting caught

6 c. all four groups had similar results. This shows that we do not cheat even when we have the opportunity to do so d. the fourth group did significantly worse than the third group, which did significantly worse than the second group, which did as well as the control group

a.i.24. The series of experiments discussed in the previous question was repeated under different circumstances. In one series of experiments, students were asked to write down the names of ten books they had read in high school, and in another series of experiments, students were asked to write down as many of the Ten Commandments as they could recall. The results showed that

a. the level of cheating was the same for the two sets of experiments. This meant that cheating depends on the incentive to cheat and not on the moral environment b. the students who were asked to recall the Ten Commandments did not cheat, and the students who were asked to write down the names of ten books did cheat. This shows that our willingness to cheat depends on the moral environment we are in c. the students who were asked to recall the Ten Commandments cheated less, and those who recalled more of the Ten Commandments cheated less. This indicates that the extent of cheating is heavily influenced by the extent of our religious studies d. the students who were asked to recall the Ten Commandments did not cheat, and neither did the students who were asked to write down the names of ten books