4. (a) Think about the study by Ariely & Wertenbroch (2002). Classify the following statements. For each correctly classified statement, you will receive +1 marks, for each incorrectly classified statement, you will receive -1 marks. • The authors run an experiment with students to understand whether people adhere to deadlines. • Figure 4 (below) shows that the majority of students select their deadlines like a time-consistent, rational individual. Figure 4 suggests that some students are aware of their self-control problems. • In the absence of sophistication, students cannot act on their procrastination. • The study found that most students dislike setting costly deadlines. • The study found that one large deadline at the end would be the best as it provides maximum flexibility. ● Frequency 50 45 40 35 30 25 20 15 10 5 1 Percentage of participants 30.0% 25.0% 20.0% Paper 3 Paper 2 Paper 1 15.0% 2 10.0%- 5.0% 3 Fig. 1. Frequency distribution of the declared deadlines in Study I as a function of the week of class (Week 1 is the first week, and Week 14 the last week), plotted separately for the three papers. Figure 4: Desired Deadlines in Study 1 (Ariely & Wertenbroch, 2002) 0.0% 4 (b) Which of the following is true about the graph displayed in Figure 5? For each correctly classified statement, you will receive +1 marks, for each incorrectly classified statement, you will receive -1 marks. 5 Distribution of Contribution Rates for New Plan Participants before and after the Maximum Rate was Increased from 16 to 100 Percent of Pay 6 8 Week # 9 10 11 12 13 14 ☐2001 ■2002 Contribution rate Note: The above chart displays the distribution of contribution rates at a large defined contribution plan administered by Hewitt Associates. In 2002, the maximum contribution rate allowed under the plan was increased from 16 percent to 100 percent of pay in accordance with the Economic Growth and Tax Relief Reconciliation Act of 2001. The chart displays the distribution of contribution rates for partici- pants who joined the plan in 2001 versus those who joined in 2002 after the maximum rate was increased. For more details, see Hewitt Associates (2000a). Figure 5: Contribution Rates (Benartzi & Thaler, 2007) • The graph shows that people are rational. • One heuristic that can be seen in the graph is the conjunction effect. • One heuristic that can be seen in the graph is the round number heuristic. • One heuristic that can be seen in the graph is inertia. • People in 2001 who chose 16% did not use heuristics. • The graph shows that more than a quarter of participants chose the minimum neces- sary contribution of 6% to receive the employer match. 3. (a) Consider the below displayed value functions of two people, Person A (Fig- ure 1) and Person B (Figure 2). The scale of the axes is the same in both figures. f Figure 1: Person A (i) + Compare the two persons regarding all of their preferences that you can speak to based on these figures. Figure 2: Person B (b) In prospect theory, imagine a person who is loss averse, but neither risk averse nor risk seeking. How would their value function look like? Describe in a way that would allow someone to draw the value function. (c) In Greater Anglia trains, going for example from London to Colchester, you can find the following sign (see Figure 3). explain. A PENALTY FARES You may be liable to pay a Penalty Fare if you travel without a valid ticket. A Penalty Fare is £100 plus the price of the appropriate single fare for your intended journey. However, if it is paid within 21 days, the Penalty Fare is reduced to £50 plus the price of the single fare. Explain why the company uses the pricing scheme for penality fares (described in the last two sentences) and why they explain it in this way. Be as specific as possible, referring to models and using terms that you have learned about in the module. (ii) What could be a downside of explaining the scheme in that way? Briefly Figure 3: Sign