People Often Behave as If the Law of Small Numbers

question 3

Multiple Choice

People often behave as if the law of small numbers were true rather than the law of large numbers. This is MOST related to the tendency for people to:

• A) not take into account the fact that samples vary and that small samples may be especially affected by extreme values.
• B) more often incorrectly estimate smaller rather than larger numbers, especially when samples are small.
• C) overestimate the occurrence of coincidences, especially personally meaningful ones.
• D) inappropriately use the availability heuristic to make estimates with overconfidence about their estimates.

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Definitions:

Zero-Coupon Bonds

Bonds that do not pay periodic interest payments and are instead issued at a substantial discount from their face value.

Interest Expense

The cost incurred by an entity for borrowed funds, paid to the lender as a form of compensation for the use of the loan.

Debenture Bonds

Unsecured bonds that rely on the creditworthiness and reputation of the issuer for support, not on collateral.

Quoted Price

The most current price at which an asset or service can be bought or sold in a marketplace.