Homework 2 Behavioral Economics (ECO23/PSY23) Udayan Roy Fall 2015

Please indicate your answers on the answer sheet at the end of this document. This homework is due in class on Wednesday, October 7.

Placebo Effect

1. In the experimental results discussed in class, when two placebos were used with one described as a high price pain killer and the other as a cheap pain killer, what was the effect on pain experienced by the subjects receiving the placebos.

a. There was no effect for either placebo b. Only the low price placebo had an effect c. Only the high price placebo had an effect d. Both placebos had an effect, but the high price placebo had a greater effect e. Both placebos had an effect, but the low price placebo had a greater effect

2. In an experiment discussed in class, students drank an energy drink before taking a test in solving word puzzles. Some students paid the regular price of $1.89. Others were told that the regular price was $1.89 but were then charged a discount price of $0.89. Did the price affect the number of word puzzles completed?

a. No, both groups performed equally well. This proved that the so-called placebo effect is a myth. b. Yes, the higher price increased the number of puzzles completed c. Yes, the lower price increased the number of puzzles completed d. No, both groups performed equally well. This proved that the so-called placebo effect is true.

3. In an experiment discussed in class, students drank an energy drink before taking a test in solving word puzzles. Some students were told that the drink would “significantly improve” their performance. Others were told that the drink would “slightly improve” their performance. Did the information given to the students affect the number of word puzzles completed?

a. No, both groups performed equally well. This proved that the so-called placebo effect is a myth. b. Yes, the “significantly improve” group completed more puzzles. c. Yes, the “slightly improve” group completed more puzzles. d. No, both groups performed equally well. This proved that the so-called placebo effect is true.

4. The placebo effect discussed in class highlights the idea that

a.i.1.a.i.1.a. The things that we find more satisfying tend naturally to be more expensive to produce a.i.1.a.i.1.b. The government can make us feel less pain by requiring pharmaceutical companies to raise the prices of pain killers a.i.1.a.i.1.c. We will do better at analytical tasks if the government runs an ad campaign saying that tap water makes us smarter a.i.1.a.i.1.d. If we expect something to satisfy us, we are more likely to actually be satisfied by it a.i.1.a.i.1.e. All of the above answers are true 5. In the experiments discussed in class, when members of a stereotyped group (Asian, female, black, etc.) were reminded of their membership in the stereotyped group prior to a task, this group’s subsequent performance

a. Tended to conform more to stereotyped expectations than the performance of other groups. b. Tended to conform to the stereotyped expectations but not more so than the performance of other groups. c. Tended to contradict the stereotyped expectations more than the performance of other groups. d. Tended to contradict the stereotyped expectations but not more so than the performance of other groups. e. Was unaffected

6. In experiments discussed in class, when people were subtly reminded of their sex prior to a math test, women did ____ men. When the test takers were also told that the test wasn’t related to intellectual abilities, but was only for the study of psychological processes, women did ____ men. This indicates that the stereotype effect affects those subjected to negative stereotypes _____.

a. Worse than; Worse than; irrespective of the gravity of the situation b. As well as; worse than; in no way at all c. As well as; better than; to a greater extent when the stakes are high d. Worse than; as well as; to a greater extent when the stakes are high

Paradox of choice

7. In a famous experiment at an upscale grocery store, tasting booth A offered 6 varieties of jam and tasting booth B offered 24 varieties of jam. A ___ percent of shoppers stopped at the extensive-choice booth (booth B), and a ____ percent of tasters at the extensive-choice booth (booth B) bought a jar of jam.

a. Higher; smaller b. Higher; higher c. Smaller; smaller d. Smaller; higher

8. In a famous experiment at an upscale grocery store, tasting booth A offered 6 varieties of jam and tasting booth B offered 24 varieties of jam. The behavior of shoppers was then compared for the two booths. The results of the jam experiment showed that

d.i.1.a. Greater availability leads to greater consumption d.i.1.b. People are attracted to simple shop displays and put off by elaborate displays d.i.1.c. People are initially impressed by the availability of choices. But they are often overwhelmed when they have to choose one item from a long list of choices. d.i.1.d. Although people may feel overwhelmed when there are too many choices, they tend to express greater satisfaction with the choices they made when they are given more choices

9. In some cases discussed in class, an excessive number of choice options can lead to

2 a. Choice paralysis – making no decision at all b. A decrease in satisfaction with the ultimate choice c. Automatic anchoring on the most expensive choice d. Either (a) or (b) e. All of the above

10. Stanford students were asked to write a term paper. Students in group A could choose their topic from a list of 30 topics, whereas students in group B had only 6 topics to choose from. The on-time completion rate was higher for the ____ group. The quality of the essays was judged to be higher for the ____ group.

d.i.1.d.i.1.a. Many-choices; many-choices d.i.1.d.i.1.b. Many-choices; few-choices d.i.1.d.i.1.c. Few-choices; many-choices d.i.1.d.i.1.d. Few-choices; few-choices

11. The Paradox of Choice refers to the concept that

a. people start with an implicitly suggested reference point and make adjustments to it to reach their estimate b. your choices are significantly influenced by the choices of those around you c. you are much more likely to choose tempting options when they are easily available d. you can influence the degree to which you are willing to trade immediate gratification for future outcomes e. while some choice may be desirable, excessive choice can make decisions more difficult and less satisfying

12. Evidence in favor of the paradox of choice was found with regard to

a. the likelihood of employee participation in retirement funds as the number of investment options increased b. user satisfaction from a digital video recorder as the number of features increased c. viewer satisfaction as the number of TV channels increased d. consumer satisfaction as the variety of chocolates in a gift box increased from 6 to 30 e. all of the above

Loss Aversion

13. If the same option is framed as a loss, rather than as a gain,

a. There will be no effect on the likelihood of people selecting either option b. More people will be willing to take a risk to avoid the “loss” option c. Fewer people will be willing to take a risk to avoid the “loss” option d. More people will be willing to take a risk to avoid the “gain” option e. Framing reduces satisfaction with all potential outcomes

14. A study tracking 10,000 stock brokerage accounts from 1987-1993 found that individual investors were

3 a. More likely to sell winning stocks than losing stocks, although holding the losing stocks ended up being less profitable b. More likely to sell losing stocks than winning stocks, although holding the losing stocks would have been less profitable c. More likely to sell winning stocks than losing stocks, although holding the losing stocks ended up being more profitable d. More likely to sell losing stocks than winning stocks, even though holding the losing stocks would have been more profitable e. Showed no preference between selling winning or losing stocks

15. Experiments have shown that people will accept a gamble with equal odds of a loss and a gain, as long as

a.i.1.a.i.1.a. the gain is roughly equal to the loss a.i.1.a.i.1.b. the gain is roughly twice the loss a.i.1.a.i.1.c. the loss is roughly twice the gain a.i.1.a.i.1.d. the gain is higher than the loss, even if slightly

Endowment Effect

16. The endowment effect is best summarized by the description

a. Availability beats cognition b. Too few or too many choices can reduce satisfaction c. Ownership enhances satisfaction d. Satisfaction is determined by my circumstances relative to others in my peer group e. If I expect an experience to be positive or negative, then it probably will be

17. In the experiments described in class, people were first given ownership of an item A. Then, they were given the chance to trade item A for item B. Which of the following is true?

a. Fewer people traded item A for item B than would have chosen item B had they initially been given a choice between A and B b. More people traded item A for item B than would have chosen item B had they initially been given a choice between A and B c. The same number of people traded item A for item B as would have chosen item B had they initially been given a choice between A and B d. They never traded item A for item B e. They always traded item A for item B

18. Many businesses offer money-back guarantees. Why?

a.i.1.a.i.1.a. People tend to confuse money-back guarantees with mail-in rebates a.i.1.a.i.1.b. If a customer pays for a product today and returns it two months later, the business can still earn interest on the revenue from the sale for two months a.i.1.a.i.1.c. With a money-back guarantee, even those who consider the product less valuable than its price will be willing to try it. Once they take the product home, the loss

4 aversion effect will raise the value they place on the purchased product, making it less likely that they would return the product to the store. a.i.1.a.i.1.d. With a money-back guarantee, even those who consider the product less valuable than its price will be willing to try it. Once they take the product home, the endowment effect will raise the value they place on the purchased product, making it less likely that they would return the product to the store. a.i.1.a.i.1.e. None of the above

19. In a study discussed in class, Duke University students were contacted after a lottery of tickets to Duke’s basketball games. Which of the following is true?

a.i.1.a.i.1.a. Those who had won tickets were unwilling to sell for less than $2,400, on average, indicating that they valued the tickets at $2,399, on average. Those who had not won tickets were unwilling to pay more than $170 for a ticket, on average, indicating that they valued the tickets at $171, on average. This proved that the mere possession of an object can raise owners’ satisfaction from the object. a.i.1.a.i.1.b. Those who had won tickets were willing to sell for $170 per ticket or more, on average, indicating that they valued the tickets at $169, on average. Those who had not won tickets were willing to pay more than $2,400 for a ticket, on average, indicating that they valued the tickets at $2,401, on average. This proved that people quickly get disenchanted with what they have and hanker after what they do not have. a.i.1.a.i.1.c. The price at which the ticket winners were willing to sell their tickets was equal to the price that others were willing to pay to buy tickets. This confirmed an idea in traditional economics that the valuation of an object should not be different for two groups of randomly chosen people. a.i.1.a.i.1.d. The results provided evidence in favor of the placebo effect

20. In an experiment discussed in class, students were randomly assigned to Groups A, B, and C. Students in Group A were given a coffee mug at the beginning of the class, and given the chance to exchange the coffee mug for a candy bar at the end of the class. Students in Group B were given a candy bar at the beginning of the class, and given the chance to exchange the candy bar for a coffee mug at the end of the class. Students in Group C were given a choice between a coffee mug and a candy bar at the beginning of the class. The results confirmed the endowment effect because the percentage of students who ended up with a coffee mug was

a.i.1.a.i.1.a. Highest for Group A, second-highest for Group B, and lowest for Group C a.i.1.a.i.1.b. Highest for Group A, lowest for Group B, and second-highest for Group C a.i.1.a.i.1.c. Lowest for Group A, highest for Group B, and second-highest for Group C a.i.1.a.i.1.d. Roughly equal for all three groups

5 ANSWER SHEET Homework 2 Behavioral Economics (ECO23/PSY23) Udayan Roy Fall 2015

NAME: ______

DATE: ______

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