Behavioral Finance 1- Neurological research and the relevance to financial decision making Flashcards
Summarize the biological processes involved in financial decision-making.
Involuntary decisions
Logical decisions
What part of the brain is responsible for logical decisions?
Prefrontal cortex
What part of the brain is responsible for involuntary decisions heatbeat, breathing?
Amygdala Reptilia
Define intuitive and deliberative decision-making.
System 1 (intuition) is fast, automatic, and effortless
System 2 (deliberative thinking) is slow, controlled, and effortful.
Compare and contrast intuitive and deliberative decisions-making.
System 1 (intuition) is fast, automatic, and effortless
System 2 (deliberative thinking) is slow, controlled, and effortful.
What 2 systems does Daniel Kahneman (Kahneman, 2002), describe in human decision-making?
System 1 (intuition) is fast, automatic, and effortless
System 2 (deliberative thinking) is slow, controlled, and effortful.
Describe expected value theory.
Expected Value -Blaise Pascal 1670
Postulates that achievement-related choices are motivated by a combination of people’s expectations for success and subjective task value in particular domains.
For example, children are more likely to pursue an activity if they expect to do well and they value the activity.
Describe descriptive utility function theory.
In classical economics, expected utility theory is often used as a descriptive theory—that is, a theory of how people do make decisions—
Describe Prospective Theory.
describes how individuals evaluate gains and losses
The theory names two specific thought processes: editing and evaluation.
t is important to note that prospect theory also observes how people mentally
“frame” predicted outcomes, often in very subjective terms; this accordingly affects
expected utility.
Describe Adaptive Market Hypothesis.
Compare and contrast Expected Value, Utility Function, The Mean Variance Model and Adaptive Market Hypothesis.
Explain how behavioral finance theory evolved over time.
Describe prescriptive utility function theory.
or as a predictive theory—that is, a theory that, while it may not accurately model the psychological mechanisms of decision-making, correctly predicts people’s choices.
