Frye Personal Finance Unit 1: Behavioral Economics

Values

100

Unrelated to how much money we actually have, these values reflect what we think or believe about money

Financial Values

200

Our personal identity (how we see ourselves) and our social identity (how we believe others see us)

Inner Values

300

Principles that are important to you because of the community in which you live

Social Values 

400

The tangible aspects of life, the external world, our physical health and well-being

Physical Values

500

What are the four values in Personal Finance?

Inner, Social, Physical, and Financial

Biases

100

This bias refers to your tendency to allow your impression of others in one area to influence your overall impression.

Halo Effect/Bias

200

The tendency to search for information that supports our preconceptions and to ignore or distort contradictory evidence

Confirmation Bias

300

The tendency to make decisions about a current situation based on what resources you have already invested in the situation

Sunk Cost Fallacy

400

The tendency to assume things that are scarce are valuable and things that are abundant are not

Scarcity Bias

500

The tendency to conform to the behaviors and beliefs of the people around you

Herd Mentality / FOMO

Biases

100

This bias refers to your tendency to perceive events as more predictable after they happen.

Hindsight Bias

200

A bias in which people tend to strongly prefer avoiding losses as opposed to achieving gains.

Loss Aversion Bias 

300

Occurs when you hold a false idea about your level of talent, intellect, or skills.

Overconfidence Bias

400

The tendency to put more value on things you already own

Endowment Effect

500

Refers to your tendency to rely too heavily on the first piece of information you encounter, even if you receive information later that contradicts it.

Anchoring

Questions

100

Andrew wants to buy a specific model of a new car. He conducts research and finds many resources that highlight the benefits of that car model. Which cognitive bias might be influencing  Andrew’s decision making?

1. Confirmation bias
2. Hedonic Adaptation
3. The Sunk Cost Fallacy
4. Overconfidence

1. Confirmation Bias

200

Mina wants to start using an investment app that all of her friends are raving about. She hasn’t done any research on the app, but she trusts her friends’ judgment. At home, Mina’s mom points out that Mina is being influenced by FOMO and herd mentality. All of the following are things Mina can do to overcome these cognitive biases EXCEPT…

1. Take time to reflect and identify why she is so eager to use the app
2. Watch a positive video about the app, download the app, and start using it that day
3. Ask people outside her friend group for their opinions and perspectives
4. Seek out reviews that talk about the disadvantages of using the app

2. Watch a positive video about the app, download the app, and start using it that day

300

Which of the following is TRUE about cognitive biases?

1. It is easy to recognize when cognitive biases are influencing our own decisions
2. There is rarely anything you can do to combat a cognitive bias’ influence
3. There are only a handful of cognitive biases that exist
4. Awareness is often the first step to overcoming the influence of a cognitive bias

4. Awareness is often the first step to overcoming the influence of a cognitive bias

400

You go to a restaurant and order a big meal. Even though you’re full, you keep eating because it was expensive. This is an example of...

1. Mental Accounting
2. The Sunk Cost Fallacy
3. Fear of Missing Out
4. The Endowment Effect

2. Sunk Cost Fallacy

500

Cognitive bias is…

1. An error in the way we think that can influence our decisions
2. The desire to seek out information that confirms our existing beliefs
3. The belief that our abilities are better than they actually are
4. The concept of placing more value on an item when we own it

1. An error in the way we think that can influence our decisions

How to Avoid Bias

100

Why do you think awareness of cognitive biases is the first step to overcoming them?

Knowing what cognitive biases are and learning about the most common ones can help us recognize when they are impacting our decisions. By becoming aware of them, we can take steps to make a different decision that is more rational and aligns with our priorities.  

200

To prevent cognitive biases or FOMO (Fear Of Missing Out) from leading to impulsive, unplanned purchases, which of the following is a recommended strategy?

1. Implement a cooling-off period, such as waiting 24 hours before buying.

2. Buy immediately so you do not miss out on the current trend.

3. Rely on your gut feeling every single time you see a sale.
4. Shop while you are feeling emotional or tired to get the best deals.

1. Implement a cooling-off period, such as waiting 24 hours before buying.

300

ou often find yourself making impulse purchases online because it is so easy to click "buy now" with stored credit card details. Which of the following is an effective way to overcome this spending habit?

1. Make a strict monthly budget and review it at the end of the month.

2. Delete your saved credit card information from shopping websites to force yourself to type it in every time.

3. Buy gift cards for the stores you like so you can only spend a specific amount.

4. Tell your friends about your shopping habit so they can hold you accountable.

2. Delete your saved credit card information from shopping websites to force yourself to type it in every time.

400

You have researched a specific stock and are absolutely convinced its price will double in the next year. To avoid falling into the trap of confirmation bias, what actionable strategy should you take before investing your money?

1. Read five more articles that highlight all the reasons why this company is highly recommended by experts.

2. Buy a small amount of the stock first to test the waters and gain confidence.

3. Actively search for arguments or financial reports that outline the risks and reasons why the stock might fail.

4. Trust your initial research completely because acting quickly is the most important part of investing.

3. Actively search for arguments or financial reports that outline the risks and reasons why the stock might fail.

500

Every month you intend to save, but by the time you pay all your bills and buy groceries, you realize you have spent all your leftover cash. What pre-commitment strategy can you use to ensure you successfully save money?

1. Keep your savings in cash hidden in your room so you are less tempted to spend them.

2. Wait until the end of the month and put whatever money is left into your savings account.

3. Promise yourself that you will not buy anything except essentials for the next three months.

4. Set up an automatic transfer that moves money into a savings account on the exact day your paycheck arrives.

4. Set up an automatic transfer that moves money into a savings account on the exact day your paycheck arrives.