Behavioral Finance

Question 1

Representativeness bias

Answer 1

A cognitive bias in which people tend to classify new information based on past experiences and classifications

Question 2

Self control bias

Answer 2

Occurs when people deviate from their long term goals

Question 3

Availability bias

Answer 3

Tendency to be overly influenced by events that have left a strong impression and/or for which it is easy to recall

Question 4

Anchoring bias

Answer 4

The anchoring bias is the tendency of the mind to give disproportionate weight to the first information it receives on a topic: initial impressions, estimates, or data, anchor subsequent thoughts and judgments.

Question 5

Prudence bias

Answer 5

The prudence bias is the tendency to temper forecasts so that they do not appear extreme or the tendency to be overly cautious in forecasting.

Question 6

Look ahead bias

Answer 6

Look-ahead bias results from using information that was unknown or unavailable at the time the investment decision was made.

Question 7

Cognitive error - belief perseverance

Answer 7

• Conservatism bias
• Confirmation bias
• Representativeness bias
• Illusion of control bias
• Hindsight bias

Question 8

Cognitive errors - information processing biases

Answer 8

Anchoring and adjustment bias
Mental accounting bias
Framing bias
Availability bias

Question 9

Emotional biases

Answer 9

Loss aversion bias
Overconfidence bias
Self control bias
Status quo bias
Endowment bias
Regret aversion bias

Question 10

barnewall two way behavioral model

Answer 10

classifies investors into passive and active
- passive : those who have not had to risk their own capital to gain money
- active : those who have had to risk their capital to gain money

Question 11

BB and K model

Answer 11

5 types ranging from confident to anxious ; from careful to impetuous
the types are
- adventurere
- celebrity
- individualist
- gaurdian
- straight arrow

Question 12

Pompian behavioral model

Answer 12

based on behavioural investor types
- Passive Preserver
- Friendly follower
- independent individualist
- active accumulator

Question 13

Passive preserver

Answer 13

low risk tolerance
emotional bias
not financially sophisticated
difficult to advise because emotional

Question 14

PP respond to

Answer 14

• high level overviews
• no quantitative details
• trust of advisor needs to be won overtime

Question 15

friendly follower

Answer 15

• passive investor
• low to moderate risk tolerance
• cognitive errors in nature

Question 16

ff respond to

Answer 16

• since cognitive, use more quantitative methods in educating them on the benefits of portfolio diversification

Question 17

independent individualist

Answer 17

• risk capital and give up security to gain wealth
• moderate to high risk
• cognitive bias

Question 18

II respond to

Answer 18

difficult to advise but will listen to sound advice
- regular education in investing concepts relevant to investor

Question 19

active accumulator

Answer 19

• high risk tolerance
• emotional perspective
• active

Question 20

Disposition effect

Answer 20

Investors are more willing to sell winners and hold onto losers

Question 21

Halo effect

Answer 21

A company with good record of growth and share price performance is seen as good investment with continued high expected returns

Question 22

course of action AA

Answer 22

take control of the investment process and not let the investor control the situation

Question 23

how to overcome behavioural finance

Answer 23

one could overcome this bias by having a disciplined approach to investment decision making. An investment policy statement would help provide discipline