Behavioral Finance

Question 1

Inappropriate extrapolation

Answer 1

Tendency to look at recent events (or market performance) and assume those events or conditions will continue indefinitely

Question 2

Prospect theory

Answer 2

Kannerman and tversky found that losses have a much greater negative impact than a gain will positive

Question 3

Fear of regret

Answer 3

Tendency to take no action than risk making the wrong one

Question 4

Cognitive dissonance

Answer 4

The challenge of reconciling 2 opposing beliefs

Question 5

Status quo bias

Answer 5

Tendency for investors to do nothing when action is called for

Question 6

Framing bias

Answer 6

Implies the way information is presented may have a significant impact on whether the individual accepts or rejects the information

Question 7

Endowment bias

Answer 7

Feeling that because you own an asset it is more valuable since it is yours

Question 8

Gamblers fallacy

Answer 8

Individual believes the onset of a random event is likely to happen following an event or series of events

Question 9

Difference between anchoring and attachment bias

Answer 9

Anchoring-holding on to a specific price

Attachment bias-holding on to an investment for emotional reasons

Question 10

Outcome bias

Answer 10

Tendency to make decisions based on desired outcome rather than probability of that outcome

Question 11

Financial enmeshment bias

Answer 11

Occurs when finances of parents and children are inappropriately commingled

May lead to children having lack of financial motivation and even to lowered confidence and self esteem