Question

The following scenarios are examples of irrational decision making. Which would be the most likely scenario for a behavioral economist to study? Select one: O a. of investing that money in purchasing a rental property. O b. John decided not to buy a new car since the price of the car he wants has increased. O c. Roger decides it's time to own a house and even though he has bad credit he is able to secure a mortgage with a higher interest rate. O d. Sherry decides to spend a year traveling around the globe and spends $30,000 on a instead O e. Jessica just graduated and was gifted a stand up paddle board even though she never learned to ride one. She could sell it for cash, but instead takes it to a lake to try it even though she doesn't much like being in water.

Answer 1

The scenario where Roger decides to purchase a house with bad credit securing a higher rate mortgage is a typical subject for behavioral economists, who explore why people make decisions that seem irrational, framed by various psychological influences.

Step-by-step explanation:

Understanding Behavioral Economics Through Irrational Decision Making

The most likely scenario for a behavioral economist to study regarding irrational decision-making is scenario c, where Roger decides to own a house even though he has bad credit and secures a mortgage with a higher interest rate. This scenario reflects how individuals make decisions that may appear irrational when judged from a purely economic standpoint and overlook the risk associated with high-interest commitments. Behavioral economics focuses on how psychological factors, framing of the situation, and cognitive biases influence individuals' financial choices. It contends that people do not always act rationally due to various subjective influences, such as the state of mind or emotions, which can lead to decisions that contradict traditional consumer theory.

One illustrative example of irrational decision-making in behavioral economics is the different reactions people might have to saving money based on the total cost of items—like saving $10 on a $20 alarm clock versus saving $10 on a $300 phone—which underscores how people 'frame' financial decisions differently. These insights from psychology help behavioral economists understand and predict economic behavior that deviates from rational models.

Answer 2

A behavioral economist would likely study the scenario in which Roger, despite having bad credit, takes a mortgage with a high interest rate, as it seems to be an irrational choice that challenges traditional economic decision-making models.

Step-by-step explanation:

The scenario that a behavioral economist would most likely study is option c: Roger decides it's time to own a house and even though he has bad credit he is able to secure a mortgage with a higher interest rate. This behavior directly challenges traditional economic theories of rational decision-making because it seems to go against Roger's financial interest to take on a higher interest rate given his bad credit situation. Behavioral economics would be interested in understanding the psychological factors and the decision frame that influence Roger's choice, which may seem irrational to traditional economic theories.

Behavioral economics enriches the understanding of decision-making by incorporating psychological insights into economic theories. It examines why individuals make decisions that might appear inconsistent or irrational to an outside observer by considering the different states of mind or emotions that can affect behavior. A key concept in behavioral economics is the idea that losses are felt more strongly than gains, which can lead to decisions like over withholding on taxes or making significant financial decisions based on anecdotal emotions rather than just the numbers.