Behavioral Finance

Question 1

Any approach to problem-solving that employs a more practical method that is not optimal or rational.
Rules of Thumb
Educated Guesses
Trial and Error

Answer 1

Heuristic Approach

Question 2

Investor sets value at initial point of information (Usually Buy Price)

Answer 2

Anchoring

Question 3

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

Answer 3

Prospect Theory

Question 4

Focus more on the most current events. Leads to faulty predictions that this is always how it will be.

Answer 4

Recency Bias

Question 5

Overestimation of ones knowledge. Underestimates risks.
Factors Include….
* Choice
*Task Familiarity
*Confirmation Bias
*Active Involvement
*Past Success

Answer 5

Overconfidence

Question 6

People seek pride and avoid regret.
Sell winners too quickly and hold loser too long

Answer 6

Disposition Effect

Question 7

Familiarity leads to this……..
Single stock Concentration

Answer 7

Home Bias

Question 8

Social interactions and comfort in groups/numbers

Answer 8

Herd Mentality