Behavior Finance 7-9 Flashcards

Question

disposition effect

Answer 1

holding the investment that have experienced losses too long, and selling investment that have experience gains too quickly - limiting upside profit - trade excessively and hold risker portfolio

Answer 2

explain for equity premium that describes an anomalously higher historical real returns of stocks over gov't bond combines time-horizon-based framing, mental accounting and loss-aversion bias more concerned with ST losses than LT results/gains over emphasis ST G/L and weight losses more heavily than gains resulting a higher equity risk premium

Answer 3

people demonstrate unwarranted faith in their intuitive reasoning, judgements, cognitive abilities. attribute success overestimated knowledge levels, ability and access to information underestimate risk and overestimate exp(r) trade excessively hold poorly diversified portfolio lower return than the market

Answer 4

fail to act in pursuit of long-term goal because of lack of self-discipline. 1. hyperbolic discount tendency to prefer small payoffs now compare to large payoffs in the future 2. save/spend disposable income, spend today rather than save for tomorrow 3. st satisfaction conflict lt goal/achievement

Answer 5

do nothing, stay the same Status quo bias reflects the tendency for forecasts to recent observations and then avoid making changes. Status quo bias can be mitigated by a disciplined effort to avoid anchoring on the status quo. need education

Answer 6

emotional attachment people value an asset more when they hold rights to it than when they do not. Refuse to sell.

Answer 7

avoid making decisions made out of fear that the decision will turnout poorly error of commission - action taken error of omission -action non-taken need education

Answer 8

the wealthier the client, the more the practitioner should and adopt to the client's behavioral biases standard living risk - the likelihood of achieve outliving his/her asset if a function of the level of wealth cognitive error should be moderated (easier to correct by education) emotional biases should be adapted to

Answer 9

passive | active

Answer 10

ACIG Adventurer - confident and impetuous 浮躁 unwilling to take advice Celebrity - anxious and impetuous seeks and take advice Individualist - confident and careful good to work with Guardian - anxious and careful seek advice from someone more knowledgable

Answer 11

BITS PFIA FROM LOWEST RISK TO HIGH ``` PP, FF,II,AA Passive preserver emotional friendly follower cognitive independent individualist cognitive active accumulator emotional ```

Answer 12

- not financially sophisicated - low risk tolerance - not willing to risk own capital display emotional biases focus of advice should be on addressing these emotions. Describing how the investment relationship will help to accomplish goals would seem most appropriate.

Answer 13

1/n divide contribution equally among available funds ignoring the issue of correlation and true diversification. consequence: * Maintaining an under-diversified portfolio with assets having high correlations with each other. * Missing long-term objectives—not achieving the required returns or capital accumulation necessary to meet long-term expenses or goals, and potentially outliving the assets.

Answer 14

individual are bias to follow the belief of a group

Answer 15

recognizes that people are not fully rational when making decisions and do not necessarily optimize but rather satisfice when arriving at their decisions

Answer 16

actions to take to avoid: assemble a diverse group of knowlegedgable members follow an agenda assure all members share

Answer 17

is a cognitive behavioral bias in which an analyst wrongly projects a reversal to a long-term trend. Misunderstands mean reversion in assuming below average rates must return to above-average rates in a specific time period.

Answer 18

1. investor can display both emotional biases and cognitive errors, making it difficult to classify the individual according to behavioral biases. 2. may display traits of more than one behavioral investor type, making it difficult to place the individual into a single category. 3. As investors age, they will most likely go through behavioral changes 4. Even though two individuals may fall into the same behavioral investor type, the individuals should not necessarily be treated the same due to their unique circumstances and psychological traits. 5. Individuals tend to act irrationally at unpredictable times because they are subject to their own specific psychological traits and personal circumstances. In other words, people don't all act irrationally (or rationally) at the same time.

Answer 19

for cognitive error high wealth low SLR moderate 5-10% low wealth high SLR close to rational 0-3% for emotional bias high wealth low SLR 10-15% low wealth high SLR 5-10%

Answer 20

an often overestimate his or her risk tolerance, may follow “hot” ideas and show availability bias, follow leads from friends/colleagues, want to be in the latest/popular investment without considering LT goal low/moderate risk tolerance overestimate risk tolerance

Answer 21

overconfident, self contribution strong skilled moderate/high risk tolerance strong-willed do own research

Answer 22

entrepreneur background, strong skilled confident, self-control higher turnover rate, involved in decision making