FINS3655 BEHAVIOURAL FINANCE
WITH 500 PRACTICE MCQS WITH
CORRECT VERIFIED ANSWERS –
COMPLETE REVISION GUIDE FOR
UNSW STUDENTS | LATEST 2026 |
100% |GRADED A+
1. In Redelmeier and Shafir's (1995) experiment with physicians choosing
between medications, what did the majority of the second group choose?
• A. They chose a different medication not in the original set.
• B. They could not decide and delayed the decision.
• C. They chose to let the patient go and have hip replacement therapy.
• D. They randomly selected one of the two medications.
Answer: C
2. In the Integrative Decision-Making framework used in this course, what does
Process 1 refer to?
• A. The process of choosing an action based on one's beliefs.
• B. The process of determining the value and risk of potential actions.
• C. The final evaluation of an outcome after the decision is made.
• D. The process of forming an emotional reaction to a potential loss.
Answer: B
3. The "decoy effect" is best illustrated by which of the following examples?
• A. An investor sells a winning stock but holds onto a losing one.
• B. A person overestimates their ability to pick winning stocks.
• C. The introduction of a third, dominated option changes preferences between
the original two.
• D. A person is more sensitive to losses than to equivalent gains.
Answer: C
4. What is a key characteristic of a "nudge" in behavioural finance?
• A. It mandates a specific choice to ensure positive outcomes.
• B. It is a significant financial incentive to change behavior.
, • C. It is an easy and cheap intervention that steers choices without forbidding
options.
• D. It relies on providing more complex information to the decision-maker.
Answer: C
5. According to Prospect Theory, when facing a decision in a loss frame, people
tend to become:
• A. More risk-averse to avoid further losses.
• B. Risk-seeking, preferring options with a chance of avoiding the loss.
• C. Indifferent to risk, as the loss is already certain.
• D. More likely to seek out more information before deciding.
Answer: B
6. The concept of "Loss Aversion" suggests that:
• A. People feel a greater pain from a loss than pleasure from an equivalent
gain.
• B. People prefer to avoid any and all financial risk.
• C. Losses are a primary driver of market volatility.
• D. The impact of a loss decreases over time more quickly than a gain.
Answer: A
7. In Prospect Theory, how do people typically evaluate outcomes?
• A. In terms of final wealth positions.
• B. In terms of gains and losses relative to a reference point.
• C. Based on the expected utility of the final outcome.
• D. Based on the probability of all possible outcomes.
Answer: B
8. Which of the following best describes the "Disposition Effect"?
• A. The tendency to invest in well-known companies.
• B. The preference for receiving small gains frequently over large gains
infrequently.
• C. The tendency to sell winning investments too early and hold losing
investments for too long.
• D. The reluctance to sell a stock for a loss to avoid realizing it.
Answer: C
9. In The Economist subscription pricing example, the presence of a
print+online subscription as a decoy is designed to:
• A. Confuse customers so they choose the most expensive option.
• B. Make the print-only subscription seem like a better deal.
, • C. Make the online-only subscription seem like the best value.
• D. Ensure customers buy all three options.
Answer: C
10. What is a key difference between classical economics and behavioural
finance?
• A. Classical economics assumes people are perfectly rational, while
behavioural finance studies how psychology influences decisions.
• B. Classical economics focuses on markets, while behavioural finance focuses
on individuals.
• C. Behavioural finance is a newer and more complex theory.
• D. There is no significant difference between the two.
Answer: A
11. The term "bounded rationality" is best described as:
• A. The idea that people's decision-making is constrained by limited
information and cognitive capacity.
• B. The rational analysis of all possible outcomes in a given situation.
• C. The ability of financial markets to process all information efficiently.
• D. The optimal decision-making process taught in economics classes.
Answer: A
12. "Anchoring" refers to the tendency for people to:
• A. Rely too heavily on the first piece of information offered (the "anchor")
when making decisions.
• B. Make decisions based on the most recent information they encountered.
• C. Focus on the long-term potential of an investment.
• D. Anchor their portfolio to a specific risk profile.
Answer: A
13. The "availability heuristic" predicts that people will:
• A. Overestimate the likelihood of events that are easily recalled from memory.
• B. Underestimate the probability of rare events.
• C. Make decisions based on a logical analysis of available data.
• D. Be influenced by the opinions of their friends and family.
Answer: A
14. "Overconfidence" in a financial context often leads to:
• A. Excessive trading and under-diversification.
• B. A preference for low-risk, low-return investments.
• C. A greater willingness to pay for financial advice.
, • D. An accurate assessment of one's financial abilities.
Answer: A
15. A "mental account" is best described as:
• A. The aggregate value of all assets and liabilities.
• B. A psychological tendency to treat money differently depending on its
source or intended use.
• C. A formal bank account used for long-term savings.
• D. The financial record-keeping system used by a business.
Answer: B
16. The "Endowment Effect" suggests that:
• A. People value an object more once they own it.
• B. People are more willing to give away what they do not own.
• C. The value of an object is determined by its purchase price.
• D. The market value of an object is equal to its emotional value.
Answer: A
17. Which of the following is a consequence of people overweighting small
probabilities?
• A. They are more likely to buy lottery tickets and insurance.
• B. They completely avoid any form of risk.
• C. They are more likely to invest in safe, low-return bonds.
• D. They make decisions based solely on the expected value of an outcome.
Answer: A
18. A person's "reference point" in Prospect Theory is often:
• A. The highest value the asset has ever reached.
• B. The current value of their assets or the status quo.
• C. A level of wealth they hope to achieve in the future.
• D. The average market return for their portfolio.
Answer: B
19. In the context of behavioural finance, "framing" refers to:
• A. The physical layout of a financial statement.
• B. The way a problem or choice is presented which can influence a decision.
• C. The legal structure of a financial product.
• D. The process of creating a new investment fund.
Answer: B
20. The "confirmatory bias" is the tendency for people to:
WITH 500 PRACTICE MCQS WITH
CORRECT VERIFIED ANSWERS –
COMPLETE REVISION GUIDE FOR
UNSW STUDENTS | LATEST 2026 |
100% |GRADED A+
1. In Redelmeier and Shafir's (1995) experiment with physicians choosing
between medications, what did the majority of the second group choose?
• A. They chose a different medication not in the original set.
• B. They could not decide and delayed the decision.
• C. They chose to let the patient go and have hip replacement therapy.
• D. They randomly selected one of the two medications.
Answer: C
2. In the Integrative Decision-Making framework used in this course, what does
Process 1 refer to?
• A. The process of choosing an action based on one's beliefs.
• B. The process of determining the value and risk of potential actions.
• C. The final evaluation of an outcome after the decision is made.
• D. The process of forming an emotional reaction to a potential loss.
Answer: B
3. The "decoy effect" is best illustrated by which of the following examples?
• A. An investor sells a winning stock but holds onto a losing one.
• B. A person overestimates their ability to pick winning stocks.
• C. The introduction of a third, dominated option changes preferences between
the original two.
• D. A person is more sensitive to losses than to equivalent gains.
Answer: C
4. What is a key characteristic of a "nudge" in behavioural finance?
• A. It mandates a specific choice to ensure positive outcomes.
• B. It is a significant financial incentive to change behavior.
, • C. It is an easy and cheap intervention that steers choices without forbidding
options.
• D. It relies on providing more complex information to the decision-maker.
Answer: C
5. According to Prospect Theory, when facing a decision in a loss frame, people
tend to become:
• A. More risk-averse to avoid further losses.
• B. Risk-seeking, preferring options with a chance of avoiding the loss.
• C. Indifferent to risk, as the loss is already certain.
• D. More likely to seek out more information before deciding.
Answer: B
6. The concept of "Loss Aversion" suggests that:
• A. People feel a greater pain from a loss than pleasure from an equivalent
gain.
• B. People prefer to avoid any and all financial risk.
• C. Losses are a primary driver of market volatility.
• D. The impact of a loss decreases over time more quickly than a gain.
Answer: A
7. In Prospect Theory, how do people typically evaluate outcomes?
• A. In terms of final wealth positions.
• B. In terms of gains and losses relative to a reference point.
• C. Based on the expected utility of the final outcome.
• D. Based on the probability of all possible outcomes.
Answer: B
8. Which of the following best describes the "Disposition Effect"?
• A. The tendency to invest in well-known companies.
• B. The preference for receiving small gains frequently over large gains
infrequently.
• C. The tendency to sell winning investments too early and hold losing
investments for too long.
• D. The reluctance to sell a stock for a loss to avoid realizing it.
Answer: C
9. In The Economist subscription pricing example, the presence of a
print+online subscription as a decoy is designed to:
• A. Confuse customers so they choose the most expensive option.
• B. Make the print-only subscription seem like a better deal.
, • C. Make the online-only subscription seem like the best value.
• D. Ensure customers buy all three options.
Answer: C
10. What is a key difference between classical economics and behavioural
finance?
• A. Classical economics assumes people are perfectly rational, while
behavioural finance studies how psychology influences decisions.
• B. Classical economics focuses on markets, while behavioural finance focuses
on individuals.
• C. Behavioural finance is a newer and more complex theory.
• D. There is no significant difference between the two.
Answer: A
11. The term "bounded rationality" is best described as:
• A. The idea that people's decision-making is constrained by limited
information and cognitive capacity.
• B. The rational analysis of all possible outcomes in a given situation.
• C. The ability of financial markets to process all information efficiently.
• D. The optimal decision-making process taught in economics classes.
Answer: A
12. "Anchoring" refers to the tendency for people to:
• A. Rely too heavily on the first piece of information offered (the "anchor")
when making decisions.
• B. Make decisions based on the most recent information they encountered.
• C. Focus on the long-term potential of an investment.
• D. Anchor their portfolio to a specific risk profile.
Answer: A
13. The "availability heuristic" predicts that people will:
• A. Overestimate the likelihood of events that are easily recalled from memory.
• B. Underestimate the probability of rare events.
• C. Make decisions based on a logical analysis of available data.
• D. Be influenced by the opinions of their friends and family.
Answer: A
14. "Overconfidence" in a financial context often leads to:
• A. Excessive trading and under-diversification.
• B. A preference for low-risk, low-return investments.
• C. A greater willingness to pay for financial advice.
, • D. An accurate assessment of one's financial abilities.
Answer: A
15. A "mental account" is best described as:
• A. The aggregate value of all assets and liabilities.
• B. A psychological tendency to treat money differently depending on its
source or intended use.
• C. A formal bank account used for long-term savings.
• D. The financial record-keeping system used by a business.
Answer: B
16. The "Endowment Effect" suggests that:
• A. People value an object more once they own it.
• B. People are more willing to give away what they do not own.
• C. The value of an object is determined by its purchase price.
• D. The market value of an object is equal to its emotional value.
Answer: A
17. Which of the following is a consequence of people overweighting small
probabilities?
• A. They are more likely to buy lottery tickets and insurance.
• B. They completely avoid any form of risk.
• C. They are more likely to invest in safe, low-return bonds.
• D. They make decisions based solely on the expected value of an outcome.
Answer: A
18. A person's "reference point" in Prospect Theory is often:
• A. The highest value the asset has ever reached.
• B. The current value of their assets or the status quo.
• C. A level of wealth they hope to achieve in the future.
• D. The average market return for their portfolio.
Answer: B
19. In the context of behavioural finance, "framing" refers to:
• A. The physical layout of a financial statement.
• B. The way a problem or choice is presented which can influence a decision.
• C. The legal structure of a financial product.
• D. The process of creating a new investment fund.
Answer: B
20. The "confirmatory bias" is the tendency for people to:
