Behavorial Finance Flashcards
Biases on existing beliefs
- cognitive dissonance
- conservatism bias
- confirmation bias
- representative bias
- illusion of control bias
- hindsight bias
Cognitive Dissonance
HIGH
confusion or frustration that arises when an individual receives new info that doesnt match up with or conform to preexisting beliefs or experiences
Conservatism Bias
HIGH
people cling to their prior views or forecasts at the expense of acknowledging new info, individuals are inherently slow to change
analysts forecast are great at telling you what just happened.
Confirmation Bias
people observe, overvalue or actively seek out information that confirms what they believe while ignoring or devaluing information that contradicts beliefs
Example: Holding IBM company stock in the 90s or playing Poker
Representative Bias
individuals process new info using pre existing ideas or beliefs an investor views a particular situation or information a cetain way because of similarities to other examples even if it does not really fit into that category
ex: base rate neglect (generalizing performance) and sample size neglect
Illusion of Control
people believe they can control or influence investment outcomes when they cant.
example: throwing a dice harder for a better roll.
Hindsight Bias
investors perceive investment outcomes as if they were predictable. Can make investors take excessive risk.
Biases based on Information Processing
HIGH
- mental accounting
- anchoring and adjustment bias
- framing bias
- availability bias
- self attribution bias
- outcome bias
- recency bias
Mental Accounting
HIGH
individuals treat various sums of money differently basdon where these monies are mentally categorized. individual things in buckets. can lead to high risk taking as wealth grows. “house money” effect.
example: buying tickets on CC vs cash
Anchoring and Adjustment Bias
HIGH
investors are influenced by purchase point or arbitrary price levels and clieng to htese numbers when buying or selling
examples: Appraisals coming at/near purhase
Framing Bias
individuals responds to similar situations differently based on the context in which choice is presented.
Availability Bias
easily recalled outcomes (often from more recent info) are perceived as being more likely than those that are harder to recall or understand.
example: choosing fidelity or schwab funds bc they come up first on goog
Self Attribution Bias
people ascribe successes t o their innate talents and blame failures on outside influences.
Outcome Bias
people often make decisions based on outcome of past events rather than by observing the processes by or through which that oucome occurred.
Recency Bias
people more easly recall and emphasize recent events and often identify recent patters where there are none.
can cause ignoring fundamental value of something
Biases based on emotion
- loss aversion
- overconfidence
- self control
- status quo
- endowment
- regret aversion
- affinity
Loss Aversion Bias
HIGH
pain of loss is roughly twice as painful as the pleasure of gains
Overconfidence Bias
unwarranted faith in ones own thoughts and abilities.
Self Control Bias
focus on the instant gratification due to lack of discipline, consequently failing to act in the best interest of long term goals.
Status Quo Bias
facing an array of options, predisposes people to select the option that keeps conditions the same.
Endowment Bias
HIGH
people tend to value an object more when they actually hold or own it; discounting the value of objects they do not currently possess.
example: holding on to a collectible item
Regret Aversion Bias
avoid making decisions because they are afride they will make a mistake.
Affinity Bias
individuals making decisions based on how they believe a certain product or service will reflect their values. **ESG
Sunk Cost Fallacy
doubling down on a bad investment. Emotionaly tied to an initial choice. TIED TO ancoring and status quo biases.
Get Even Itis
holding onto a losing investment hoping to get even
Snake Bit effect
investor experience losses and then become more risk averse, not wanting to touch that asset class/choice again.
Disposition Effect
HIGH
the idea that investors hold on tolosing investments too long and sell winning investments too early
Ambiguity Bias
knowing a team has a 70% change of winning, but not willing to bet, so you would still rather take a 50/50. In investment world, even when investor is knowledgeable, they may not be willing to stake claims.
Optimism Bias
bad returns can happen to others but not me. example- holding company stock in your 401k.
Investor Personality Types
HIGH
Preservers, Followers, Independants, Accumulators
Preservers
passive investors who place emphasis on financial security.
Followers
passive who dont have own ideas. follow leads of colleagues.
Independents
active investor with medium to high risk tolerance who is strong willed and independent minded thinker. trust their insticts.
Accumulators
active investor, control own wealth creation. risking own capital in acheiving wealth objectives.
Bailard, Biehl, & Kaiser Model
- adventurer
- celebrity
- individualist
- guardian
- straight arrow
Adventurer
people who put it all on one bet. hard to advise
celebrity
like to be where the action is, do not like being left out. no own ideas about investments
individualist
go their own way, small business/entreprenuer, careful methodical analytical.
Guardian
careful and worried about money. at or near retirement and want to preserve assets.
Straight Arrrow
well balanced.
