Unit 1 Behavioral Economics Review

high levels of happiness

A positive event initially makes us feel ________.

meaningful lives

When money is tight, people can not live full or ________.

Personal Finance Unit 1

Behavioral Finance Test Review

Test will contain

25 Multiple Choice Questions; 5 Short Answer; 1 Essay****Test questions are a mixed of definitions and real-life scenarios

Section 1

Your Values and Money

Inner Value

Strong _______ translate to trusting ones gut or following the inner voice, which can give the person the resourcefulness to overcome a sudden money crunch

Social Value

How we handle money is, in part, tied up in our unique family histories

Physical Value

A person with strong ___________ also might prioritize getting more insurance to protect their valuables, and might spend more than others on home and self-care (e.g., gym memberships, beauty treatments, dry cleaning, interior design)

Financial Value

" Those with strong financial values likely think more about the sustainability of their money and generally have more in reserve

Section 2

Your Brain and Money

Overconfidence Bias

The tendency people have to be more confident in their own abilities or opinions when compared to others

Cognitive Bias

A cognitive bias is a systematic error in thinking that occurs when people are processing and interpreting information in the world around them and affects the decisions and judgments that they make….Everyone exhibits cognitive bias

Behavioral Economists

View people as irrational beings who sometimes let emotions influence their decisions

Traditional Economists

 View people as completely rational beings who always make perfect, logical decisions that serve their best interests

Section 3

Loss Aversion

Loss Aversion

We tend to feel the effect of losses more than the effect of similar gains

Overcoming Loss Aversion

Reframe the situation so that you focus on the potential gains

Free Trials and Samples

When given access to a paid service, you gain a sense of ownership

Coupons

The purpose of the coupon is to get you to purchase the item because you dont want to miss out on

Scarcity and Urgency

when there is limited time or very few of an item left, you might feel pressured to act now

Buy now, get it tomorrow

This strategy hopes that the thought of losing out on having this item as soon as possible will motivate you to act now

Buy now get it X% off

the hope is by giving you an incentive that can only be received by buying within a limited window of opportunity, you will feel just enough pressure to make the purchase

Protect people from loss

This strategy hopes that your fear of losing something important to you will cause you to make a purchase to protect it

Progress Bars

The hope is you will see the progress youve made and not want to give up as you get closer to finishing

Section 4

Endowment Effect and Sunk Cost

Endowment Effect

Valuing things we own more highly just because we own them

Sunk Cost

Investments of time, effort, and money that cannot be recovered no matter what we do, so they shouldnt be considered when making decisions

Section 5

Herd Mentality and Fomo

Herd Mentality

The tendency to choose an option that the majority chooses is due to a cognitive bias called Herd Mentality, also known as The Bandwagon Effect

FOMO

The Fear of Missing out

Section 6

Confirmation Bias and Overconfidence

Confirmation Bias

is our tendency to seek out and interpret information in a way that confirms what we already believe

Section 7

Happiness and Hedonic Adaptation

Part II

Short answer questions