Behavioral Finance

Question 1

Affect Heuristic

Answer 1

Deals with judging something, whether it is good or bad. Do they like or dislike some company based on non-financial issues.

Question 2

Anchoring

Answer 2

Attaching or anchoring one’s thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in questions. Anchoring is also known as conservatism or belief perseverance.

Question 3

Availability Heuristic

Answer 3

When a decision maker relies upon knowledge that is readily available in his or her memory, the cognitive heuristic known as “availability” is invoke. This may cause investors to overweight recent events or patterns while paying little attention to longer term trends.

Question 4

Bounded Rationality

Answer 4

When individuals make decisions, their rationality is limited by the available information, the tractability of the decision problem, the cognitive limitations of their minds, and the time available to make the decision. Decision-makers in this view act as satisficers, seeking a satisfactory solution rather than an optimal one. One consequence of this concept is that having additional information does not lead to an improvement in decision making due to the inability of investors to consider significant amounts of information.

Question 5

Confirmation Bias

Answer 5

A commonly used and popular phrase is that “you do not get a second chance at a first impression.” People tend to filter information and focus on information supporting their opinions.

Question 6

Cognitive Dissonance

Answer 6

The tendency to misinterpret information that is contrary to an existing opinion or only pay attention to information that supports an existing opinion.