Behavioral Finance Flashcards
A __________ is any approach to problem-solving that employs a more practical method that is not guaranteed to be optimal or rational, but is sufficient for reaching a short-term goal or approximation.
heuristic
An investor sets a value at the initial point of information (typically their buy price)
Anchoring
People suffer more greatly from losses than they benefit from gains
Prospect Theory
Investors focus more on the most current events, leading to faulty predictions that this is how it will always be
Recency Bias
People overestimate their knowledge, underestimate risks and exaggerate their ability to control events and predict outcomes
Overconfidence
Factors Leading to Overconfidence
- Choice
- Task familiarity
- Information (confirmation bias)
- Active involvement
- Past success
Our overall impression of a person influences how we feel and think about their character
Halo Effect
Investors have a stronger desire to avoid losses than obtain gains
Loss Aversion Bias
Investors value an asset more when they own it, whether due to purchase or inheritance
Endowment Bias
People categorize and group assets into separate mental accounts, even though the money is the same regardless of its use
Mental accounting
People take substantial drawdowns in their investment in stocks and other types of assets and then tend to seek to avoid risk as a result of their losses
Snake Bite Effect
Investors perceive easily recalled possibilities as the best choices
Availability bias
Investors have tendency to credit their success to talent and skill and blame their failures on situations beyond their control
Self-Attribution bias
Investors ignore newly acquired information because it conflicts with previous views
Cognitive Dissonance bias
People emphasize ideas that confirm their beliefs while devaluing ideas that contradict their beliefs
Confirmation bias
