Behavioral Finance Flashcards
Types of Behavioral Biases
Present Bias
Loss Aversion
Herding
Anchoring
Mental Accounting
The Endowment Effect
Overconfidence
Hindsight Bias
Regret
Status Quo Bias
Risk Aversion
Present Bias
Tendency to rather settle for a smaller reward than to wait for a larger future reward.
It also can been seen as an Irrationality where there is no pressing need for liquidity
Herding
Follow the crowd mentality - Investors follow other investors in the fear that they might miss out on a trend
Anchoring
Arbitrary backwards-looking nature
E.g. buying a share for £1 and then thinking anything below is cheap and anything above is expensive
Mental Accounting
Investors often compartmentalize money and have pots for different needs. The same can be said for investment returns which can be delusionary.
The Endowment Effect
Investors tend to value a stock simply because they own them and have aversion to losing them. This can be said to many inherited investments.
Overconfidence
Overconfidence in one’s own ability ability to predict events - backed up by numerous studies. Often made worse by selective memory - remembering the good investments but not the bad.
Hindsight Bias
This is where people can give detailed reasons for an event after it has happened. The ease at which such explanations can occur can lead to advisers being blamed.
Regret
A situation where a worthwhile rise has not worked out.
Status Quo Bias
This is the dislike of change and preference to keep things the way they are even where it may nit be the most beneficial course of action
Risk Aversion
Where a client has capacity and means to take some risk but chooses not to do so
Loss Aversion
Unwilling to crystallise a loss as it will make it real
