Financial Literacy Test #1

These flashcards cover key concepts related to cognitive biases in decision-making, including examples and strategies for avoiding poor decisions.

What is the sunk cost fallacy?

The tendency to continue an endeavor once an investment in money, effort, or time has been made.

Give an example of the sunk cost fallacy.

Continuing to eat a meal when you're already full to 'get your money's worth.'

What is one strategy to avoid the sunk cost fallacy?

Remind yourself that you cannot change sunk costs and acknowledge losses as opportunities for growth.

What does herd mentality refer to?

The human tendency to do something just because others are doing it.

What is FOMO?

Fear of Missing Out; the psychological discomfort from being left out of a group.

Give an example of a decision influenced by herd mentality.

Buying expensive shoes just because friends are buying them.

How can someone avoid making decisions based on herd mentality?

Remind yourself that it's okay to be different from others.

What is confirmation bias?

The tendency to seek information that confirms existing beliefs and ignore contradicting evidence.

Provide an example of confirmation bias in decision-making.

Paying attention to information supporting a decision to go to SHSU while ignoring evidence for free college in Europe.

What is one strategy to overcome confirmation bias?

Reflect on whether you are fairly considering all alternatives and look for information to disprove your beliefs.

What is the endowment effect?

The tendency to value something more highly simply because one owns it.

Give an example of the endowment effect.

Winners of a lottery perceiving the value of a ticket as $1,400 while losers perceive it as $170.

How can one avoid poor decisions based on the endowment effect?

Ask if you are assigning too much value to something just because it’s yours.

What is the overconfidence effect?

The tendency to overestimate one's own abilities relative to reality or others.

Provide an example of overconfidence in decision making.

Assuming you’ll only pick stocks that will increase in value.

What is one strategy to avoid overconfidence in decisions?

Remind yourself that you can make mistakes and are fallible.

What is hedonic adaptation?

The tendency to return to a stable level of happiness after experiencing changes.

Give an example of hedonic adaptation.

Lottery winners' happiness spikes but returns to neutral over time.

How can one increase happiness despite hedonic adaptation?

Focus on spending money on experiences rather than material possessions.

What is a way to enjoy positive experiences longer?

Intentionally savor good experiences for at least 30 seconds.

What are some strategies for spending money to increase happiness?

Spend on small items or on others rather than on big purchases for self.

What is a common outcome for people who lose limbs after an accident in terms of happiness?

They tend to return to a normal level of happiness after an initial decrease.

What might you remind yourself regarding negative experiences?

It's natural to feel discomfort, and you can work to focus on positive experiences over time.

How do external factors influence decision making?

They can create biases leading to poor choices, such as herd mentality.

What should you consider when faced with a decision influenced by bias?

Consider the reasons for your choices and the potential influence of cognitive biases.

Why is it important to avoid the sunk cost fallacy?

To prevent wasting further resources on a decision that may no longer be in your best interest.

What is the benefit of acknowledging inevitable losses?

It allows for personal growth and better decision-making in the future.