medium · GMAT Verbal
Passage: The 'Old View' of economics posits that individuals are rational actors who consistently maximize utility. However, behavioral economics challenges this by identifying cognitive biases that lead to 'irrational' decision-making. For instance, the 'endowment effect' suggests that individuals value items more highly simply because they own them. This bias complicates market efficiency because sellers often demand prices higher than what objective buyers are willing to pay.
Which of the following conclusions is best supported by the passage?
- Individuals who are aware of cognitive biases are more likely to act rationally than those who are not.
- Buyers in a market consistently overvalue goods they do not yet own, leading them to offer prices above an item's objective worth.
- The endowment effect is the primary cause of all observed market inefficiencies in global trade.
- Market transactions are often delayed or prevented because of the subjective valuation of items by their current owners.
- Rational utility maximization is a flawed theory that has no predictive value in modern economic models.
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