Behavioral Finance

Question 1

What is anchoring and give an example.

Answer 1

Anchoring is where an investor sets a value at the initial point of information (typically their buy price).

Question 2

What is prospect theory and give an example?

Answer 2

People suffer more greatly from losses than they benefit from gains.

Question 3

What is break-evenitis and give an example?

Answer 3

It is when we lose once and play again to try to break even. An example is in a casino when we lose, we keep going to break eve.

Question 4

What s the house money effect and give an example?

Answer 4

The house money effect is when we take more risks with our gains. Ex: again in a casino when you win and gamble with the winnings

Question 5

_ leads to naive diversification

Answer 5

mental accounting

Question 6

What is recency bias and give an example?

Answer 6

Recency bias can make investors focus more on the most current events, leading to faulty predictions that this is always how it will be. Ex: afraid to invest after losing money in a financial crisis