Gokhale Institute of Politics and Economics

(Deemed to be University u/s 3 of the UGC Act, 1956)

Pune 411 004
M.Sc.( Financial Economics/International Business Economics and Finance) 2019-2021
Semester:- January - April 2021
Periodical Test-I
FE-B-102: Behavioural Finance

Tuesday Time: 12.00 p.m. to 01.00 p.m.

March 02, 2021 Max. Marks: 20

Instruction: Use of Scientific Calculator is allowed

Q.1 Choose the correct answer/s ( multiple choices are allowed) (12)
A. Prospect Theory (1979) shows that there is symmetry between objective
probabilities and decision-weights at low probabilities.
i. True
ii. False, low probabilities are overestimated
iii. False, low probabilities are underestimated
B. The reference point (to evaluate loss/gains) in the Value function of the Prospect
Theory (1979) is determined
i. Endogenously to the theory
ii. Exogenously to the theory; subjectively
C. Reflection effect in prospect theory implies
i. Risk-aversion in gain domain and risk-seeking in loss
ii. risk-seeking in gain domain and risk-aversion in loss
iii. Ignorance towards the common aspects of two gambles
iv. None of the above
D. Rationality under the Standard economic theory approves the influence of sunk cost
on the present decision
i. Yes
ii. No
iii. Depends on the context
iv. Only when coupled with the opportunity cost
E. According to Prof. D. Kahneman, ___ guides more than 95% of our decisions
i. System I
ii. System II
iii. Both

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F. According to the premises of behavioral economics, which of the following will
resolve the paradox of choice?
i. Comparing opportunity cost of various alternatives to choose
ii. Gathering more information about various attributes of the products for
optimal decisions
iii. Developing ‘satisficing’ heuristic
iv. All of above
G. Heuristics can (2)
i. Simplify the complex decision-making context
ii.Provide the optimizing solution
iii.Can be efficient under uncertain situation
Choose the correct pair
a) i. & ii.. are correct
b) ii. & iii.. are correct
c) i. & iii.. are correct
d) All are correct
e) All are wrong
H. For improved consumer satisfaction, hedonic editing rules driven from Prospect
Theory suggests that ------- (2)
i. Integrate multiple losses & gains
ii. Segregate multiple losses & gains
iii. Segregate multiple gains but integrate losses
iv. Segregate multiple losses but integrate gains
I. The exhibition of decoy effect has challenged the following aspects of rational
choice theory (2)
i. Completeness and reflexivity
ii. Consumer preferences are stable
iii. Consumer preferences obey transitivity axiom and do no reverse due to
inferior option
Choose the correct pair
a. i & ii
b. i & iii
c. ii & iii
d. i & ii & iii

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Q.2 With respect to the Prospect Theory (1992) (8)

A. State the difference between risk attitudes derived using Expected Utility Theory
and Value Function of the Prospect Theory? (4)
B. Explain the decision-weighting function under Cumulative Prospect Theory.
Derive the difference in risk attitudes based on level/range of probabilities (4)

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