Behavioural Economics and the Nudge

Q1. ‘Loss aversion’ as described in the passage means that people:

1. Systematically underestimate the probability of financial loss
2. Are more sensitive to losses than to equivalent gains
3. Prefer to avoid all risk in financial decision-making
4. Respond more strongly to gains when they are framed as avoiding loss

Q2. The ‘default’ as a nudge works because of which cognitive tendency described in the passage?

1. Present bias — people prefer immediate rewards
2. Loss aversion — people fear losing the default option
3. Anchoring — the default serves as an irrelevant anchor that influences the final choice
4. Inertia and framing — people tend to accept the default option as presented rather than actively opting out

Q3. The critics’ argument that nudge theory is ‘paternalistic’ is best summarised as:

1. Nudge theory is ineffective because people recognise when they are being nudged
2. Nudge theory manipulates people’s choices rather than respecting their autonomy as rational agents
3. Nudge theory is only applicable to the consumption decisions of low-income populations
4. Nudge theory is an unscientific extension of laboratory psychology to real-world policy

Q4. The defenders of nudge theory respond to the paternalism critique by arguing that:

1. People are genuinely irrational and therefore need to be managed for their own good
2. The choice environment is always designed by someone, so designing it for the majority’s own stated preferences is not manipulation
3. People who are nudged do not notice and therefore their autonomy is not affected
4. Nudges are only used for choices that do not significantly affect people’s lives

Q5. Which of the following is an example of ‘present bias’ as described in the passage?

1. A person who donates to charity because it is the default option on their employer’s payroll form
2. A person who saves less for retirement than they know they should because they prefer to spend money now
3. A person who demands a higher price for an item they own than they would pay to acquire it
4. A person who judges the value of a house by the first price they were told, even if that price was arbitrary

Q6. The passage’s overall argument is that behavioural economics is significant because:

1. It proves that people cannot be trusted to make good decisions and should be regulated more strictly
2. It demonstrates that human decision-making is unpredictable and cannot be modelled
3. It reveals systematic and predictable patterns in how people deviate from rational choice, enabling better-designed policies and choice environments
4. It provides a scientific basis for replacing market mechanisms with government-mandated choices