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Multiple Choice Quiz
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1
Managers who are excessively optimistic may
A)Bid too high when bidding for other companies.
B)Delay cost cutting during a recession.
C)Choose wrong numbers when given forecasts of sales growth.
D)Both A and B are correct.
E)A, B and C are all correct.
2
You buy $100 first-night tickets to a movie premiere. Ten minutes after the movie starts, you realize you are not really enjoying the movie. You are loss averse if you
A)Complain loudly to the manager.
B)Write to your local congressman complaining about the declining quality of movies these days.
C)Watch the entire movie because you have already paid for your ticket.
D)Walk out of the movie and read a book instead.
E)Get another bag of popcorn with extra butter to cheer yourself up.
3
Stock phrases such as “no use crying over split milk” are useful because
A)Saying them to other people allow us to look wiser than we may actually be.
B)They are reminders to help us avoid errors when our decisions might be affected by loss aversion.
C)They are not useful but hoary old clichés and are best avoided.
D)They help us conceal what we actually think.
E)None of the above.
4
You buy shares for $20. The share price drops to $15. If you are averse to a sure loss, you will
A)Sell the shares immediately
B)Buy more shares since if the shares were a good deal at $20, they must be even better at $15.
C)Do nothing but wait for the price to come back up.
D)Try to get more information about the stock.
E)Sue the company for issuing misleading statements.
5
You read about an acquisition in the newspaper and are trying to determine if the CEO is overconfident about his ability to manage the acquisition. Which of these factors might help you in your analysis?
A)The CEO has an MBA from Harvard
B)The CEO is paid 8 times the salary of the second-highest person in the firm. For comparable firms in the same industry, the ratio is 4 times.
C)The CEO has been featured prominently and favorably in the newspapers over the last six months.
D)All of the above.
E)None of the above.
6
You purchased one share one month ago at $55 and the price is now $45. Suppose that in the next month the price could go either up $10 or down $10 (with equal probability). You must choose between selling the stock now and realizing a paper loss of $10, or keep the stock in your portfolio, in which case you have a 50-50 chance of losing $20 and breaking even. You decide not to sell the stock. This is an example of
A)Excessive optimism
B)Confirmation bias
C)Aversion to a sure loss
D)Anchoring
E)None of the above
7
You have been assigned to value a project. Your analysis shows that it is a negative NPV project. Nevertheless top management decides to accept the project since based on their experiences with similar projects in the past, they believe that this one will be successful. This is an example of
A)Affect
B)Mental framing
C)Loss aversion
D)Anchoring
E)None of the above
8
An anchoring bias occurs when you
A)Overweight readily available information as opposed to more abstract information.
B)Form an estimate with an initial number and then do not adjust sufficiently from this number.
C)Accept an actuarially unfair risk in an attempt to avoid a sure loss.
D)All of the above
E)None of the above
9
Your friend tells you that he was observing someone flipping a coin a hundred times. The first ten times the coin was tossed however, it came up heads ten times in a row. Your friend concludes that the coin was biased because the odds of the coin coming up heads that frequently is extremely small. You tell him that
A)He has fallen prey to the representativeness bias since he is drawing conclusions on large samples of coin tosses based on his experiences with smaller numbers of tosses.
B)He is excessively pessimistic.
C)He is right.
D)Both a and b are correct.
E)None of the above
10
Studies have shown that the experience of increasing losses actually decreases an attacker’s willingness to stop a battle. This is an example of
A)Aversion to a sure loss
B)Overconfidence
C)Illusion of control.
D)All of the above.
E)None of the above





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