PUBH 6007 EXAM 1 TEST QUESTIONS & VERIFIED
ANSWERS
Behavioral economic models differ from traditional models by assuming that people are
_________ capable in making calculations, _________ affected by emotions, and
_________ concerned with their narrow self-interest
1. less; more; less
2. less; less; less
3. more; less; less
4. more; more; more
5. more; less; more - Answers - 1
Consider the following item, similar to other items in the Cognitive Reflection Test
(CRT). How many cubic feet of dirt are there in a hole that is 4 feet deep x 4 feet wide x
4 feet long? Identify the numeric answer most likely to be provided by System 1 thinking
and the numeric answer most likely to be provided by System 2 thinking.
1. System 1 =
2. System 2 = - Answers - 64, 0
Bounded rationality, a theory of human behavior, recognizes which of the following?
1. We overlook or ignore certain alternatives
2. Limited time to make decisions
3. Limited willpower
4. Imperfect computational abilities - Answers - 1, 2, 3, 4
You plan to tender in cash for 100% of TinyInc's shares but are unsure of what price to
offer. The main complication is this: the value of the company depends directly on the
outcome of a major pharmaceutical clinical trial that TinyInc is currently conducting. The
very viability of TinyInc depends on the outcome of the trial. If the trial fails completely,
under current management TinyInc will be worth very little - $0/share. If the trial
succeeds completely, the value under current management could be as high as
$200/share.
Given the range of trial outcomes, all share values between $20 and $200 per share are
considered equally likely. By all estimates, the company will be worth considerably more
in the hands of MegaCo. In fact, whatever the value under current management, the
company will be worth 60 percent more under the management of MegaCo than under
TinyInc.
The board of directors of MegaCo has asked you to - Answers - $0
, Which of the following arguments have been offered in defense of economists'
assumptions of strict rationality?
1. Financial incentives and real stakes will make anomalies disappear
2. Thaler suggests that people can always control their decision-making processes and
optimize their choices
3. Friedman argues that assumptions are irrelevant if theories perform well in their
predictions
4. Anomalies occur at random, and cancel one another out when aggregated
5. Dan Ariely describes human behavior as "predictably irrational" - Answers - 1, 3, 4
The value of economic theory is best described as:
1. developing a unique prediction for each person in each situation
2. developing a unique prediction for all people in each situation
3. developing unifying explanations for behaviors across people and situations
4. developing a unique prediction for each person across situations - Answers - 3
Each card below has performance information about Stock X on one side (i.e., performs
well, performs average, performs poorly), and information about the macroeconomy on
the other (i.e., recession, growth). You are evaluating a stock tip that suggests "Stock X
never performs well when there is a recession" and presented with the following cases:
Card 1= Recession
Card 2= Growth
Card 3= X performs well
Card 4= X performs average
Card5= X performs poorly
What is the minimum number of cases you need to investigate (flip the card over) to test
the hypothesis?
1. Card 5 (stock X performs poorly)
2. Card 1 (recession)
3. Card 2 (growth)
4. Card 4 (stock X performs average)
5. Card 3 (stock X performs well) - Answers - 2, 5
Recall the mergers and acquisitions (M&A) example from the class wherein a company
was considering the acquisition of a target company for which it thinks it can add value,
but whose future depended on an uncertain project outcome. Which of the following
could contribute to the winner's curse in that scenario?
1. Asymmetric information about the target firm's value
2. Overconfidence in our ability to add value to a firm we are targeting for an acquisition
3. Exceptional ability to forecast outcomes and predict value
4. Competing bids from other companies interested in acquiring the target company
ANSWERS
Behavioral economic models differ from traditional models by assuming that people are
_________ capable in making calculations, _________ affected by emotions, and
_________ concerned with their narrow self-interest
1. less; more; less
2. less; less; less
3. more; less; less
4. more; more; more
5. more; less; more - Answers - 1
Consider the following item, similar to other items in the Cognitive Reflection Test
(CRT). How many cubic feet of dirt are there in a hole that is 4 feet deep x 4 feet wide x
4 feet long? Identify the numeric answer most likely to be provided by System 1 thinking
and the numeric answer most likely to be provided by System 2 thinking.
1. System 1 =
2. System 2 = - Answers - 64, 0
Bounded rationality, a theory of human behavior, recognizes which of the following?
1. We overlook or ignore certain alternatives
2. Limited time to make decisions
3. Limited willpower
4. Imperfect computational abilities - Answers - 1, 2, 3, 4
You plan to tender in cash for 100% of TinyInc's shares but are unsure of what price to
offer. The main complication is this: the value of the company depends directly on the
outcome of a major pharmaceutical clinical trial that TinyInc is currently conducting. The
very viability of TinyInc depends on the outcome of the trial. If the trial fails completely,
under current management TinyInc will be worth very little - $0/share. If the trial
succeeds completely, the value under current management could be as high as
$200/share.
Given the range of trial outcomes, all share values between $20 and $200 per share are
considered equally likely. By all estimates, the company will be worth considerably more
in the hands of MegaCo. In fact, whatever the value under current management, the
company will be worth 60 percent more under the management of MegaCo than under
TinyInc.
The board of directors of MegaCo has asked you to - Answers - $0
, Which of the following arguments have been offered in defense of economists'
assumptions of strict rationality?
1. Financial incentives and real stakes will make anomalies disappear
2. Thaler suggests that people can always control their decision-making processes and
optimize their choices
3. Friedman argues that assumptions are irrelevant if theories perform well in their
predictions
4. Anomalies occur at random, and cancel one another out when aggregated
5. Dan Ariely describes human behavior as "predictably irrational" - Answers - 1, 3, 4
The value of economic theory is best described as:
1. developing a unique prediction for each person in each situation
2. developing a unique prediction for all people in each situation
3. developing unifying explanations for behaviors across people and situations
4. developing a unique prediction for each person across situations - Answers - 3
Each card below has performance information about Stock X on one side (i.e., performs
well, performs average, performs poorly), and information about the macroeconomy on
the other (i.e., recession, growth). You are evaluating a stock tip that suggests "Stock X
never performs well when there is a recession" and presented with the following cases:
Card 1= Recession
Card 2= Growth
Card 3= X performs well
Card 4= X performs average
Card5= X performs poorly
What is the minimum number of cases you need to investigate (flip the card over) to test
the hypothesis?
1. Card 5 (stock X performs poorly)
2. Card 1 (recession)
3. Card 2 (growth)
4. Card 4 (stock X performs average)
5. Card 3 (stock X performs well) - Answers - 2, 5
Recall the mergers and acquisitions (M&A) example from the class wherein a company
was considering the acquisition of a target company for which it thinks it can add value,
but whose future depended on an uncertain project outcome. Which of the following
could contribute to the winner's curse in that scenario?
1. Asymmetric information about the target firm's value
2. Overconfidence in our ability to add value to a firm we are targeting for an acquisition
3. Exceptional ability to forecast outcomes and predict value
4. Competing bids from other companies interested in acquiring the target company
