BF and Investment process

Question 1

Barnewall Two-Way Model

Answer 1

2 simple investor type:
+ Passive investor
+ Active investor

Question 2

Bailard, Biehl, and Kaiser Five-Way Model

Answer 2

include 2 axes:
+ confident - anxious axis
+ carefull - impetuos axis
Five investor types:
+ Adventurer
+ Celebrity
+ Individualist
+ Guardian
+ Straight Arrow

Question 3

behavior investor type

Answer 3

+ passive preserver
+ Friendly Follower
+ Independent Individualist
+ Active Accumulator

Question 4

home bias

Answer 4

under diversification and failing to invest outside the investor’s home country

Question 5

gamblers’ fallacy,

Answer 5

thinking that there will be a reversal to long-term mean more frequently than actually happens

Question 6

hot hand fallacy

Answer 6

hien tuong vao cau khi danh bac
lead individuals to incorrectly predict the continuation of a recent trend

Question 7

anomalies

Answer 7

An anomaly may exist for only the short-run and disappear once it becomes known and exploited

Question 8

Herding

Answer 8

occurs when a group of investors trade on the same side of the market in the same securities, or when investors ignore their own private information and act as other investors do

Question 9

halo effect

Answer 9

investor transfers favorable company attributes into thinking that the stock is a good buy.

Question 10

Passive Effect

Answer 10

+ who have not had to risk their own capital to gain wealth
+ gained wealth through long, steady employment and disciplined saving or through inheritance.
+ As a result of accumulating wealth passively, they tend to be more risk averse and have a greater need for security than their “active” counterparts.
+ Passive investors tend to have smaller economic resources than their active counterparts, which increases the security need while reducing risk tolerance

Question 11

Active investors

Answer 11

+ risk their own capital to gain wealth and usually take an active role in investing their own money.
+ Active investors are much less risk averse than passive investors and are willing to give up security for control over their own wealth creation.
+ Active investors gather large amounts of information about their investments to establish the feeling of control over their investments.
+ This feeling can lead to overconfidence and they beleive that they are taking less risk than they truly are.

Question 12

The adventurer

Answer 12

+ Confident and impetuous
+ Might hold highly concentrated portfolios
+ Willing to take chances.
+ Likes to make own decisions
+ Unwilling to take advice
+ Advisers find them difficult to work with

Question 13

The celebrity

Answer 13

+ Anxious and impetuous (southeast quadrant)
+ Likes to be the center of attention
+ Might have opinions but recognizes limitations
+ Seeks and takes advice about investing

Question 14

The individualist

Answer 14

+ Confident and careful
+ Independent and confident
+ Likes to make own decisions after careful analysis.
+ Good to work with because they listen and process information rationally

Question 15

The guardian

Answer 15

+ Anxious and careful
+ Cautious and concerned about the future
+ Concerned with the future and protecting assets
+ May seek the advice of someone they perceive as more knowledgeable than
themselves

Question 16

The straight arrow

Answer 16

+ Average investor
+ Sensible and secure.
+ Neither overly confident nor anxious
+ Neither overly careful nor impetuous
+ Willing to take increased risk for increased expected return

Question 17

bias of Passive Preserver

Answer 17

+ Emotional: Endowment, loss aversion, status quo, regret aversion
+ Cognitive: Mental accounting, anchoring and adjustment

Question 18

bias of Friendly Follower

Answer 18

+ Emotional: Regret aversion
+ Cognitive: Availability, hindsight, framing

Question 19

bias of Independent Individualist

Answer 19

+ Emotional: Overconfidence, self - attribution
+ Cognitive: Conservatism, availability, confirmation, representativeness

Question 20

Bias of Active Accumulator

Answer 20

+ Emotional: Overconfidence, self - control
+ Cognitive: Illusion of control

Question 21

Five-Factor Process

Answer 21

(1) Investor goals -> determine the allocation to each layer.
(2) Asset selection
(3) The number of assets: risk averse -> hold large number
(4) If an investor believes she holds an information advantage (has information others do not have), more concentrated positions will be held
(5) If an investor is loss averse, the investor will hold larger cash positions to avoid the possible need to sell assets at a loss to meet liquidity needs

Question 22

social proof

Answer 22

(1) Definition: individuals are biased to follow the beliefs of a group
(2) Solution:
+ Promote opposite opinion
+ Build the team with diversify sector experience

Question 23

The reasons why investor invest in employer stocks:

Answer 23

(1) • Familiarity and overconfidence effects
(2) Naïve extrapolation of past returns: the company done well in the past -> employee is invest in
(3) Framing and status quo effect of matching contributions: if the imployer match the stock, the employee allocate to stock
(4) • Loyalty effects
(5) • Financial incentives:

Question 24

The behavioral alpha process

Answer 24

(1) Step 1: Interview the client and identify active or passive traits and risk tolerance
(2) Step 2: Plot the investor on the active/passive and risk tolerance scale
(3) Step 3: Test for behavioral biases
(4) Step 4: Classify investor into a behavioral investor type

Question 25

limitation of classifying investor into various types

Answer 25

(1) Individuals may exhibit both cognitive errors and emotional biases
(2) Individuals may exhibit characteristics of multiple investor types
(3) Individuals will likely go through behavioral changes as they age.
(4) Individuals are likely to require unique treatment even if they are classified as the same investor type because human behavior is so complex
(5) Individuals act irrationally at different times and without predictability.

Question 26

the big picture of behavioral finance affect

Answer 26

(1) Affect adviser -client relations
(2) Affect portfolio construction
(3) Affect analyst forecast & overconfidence in forecasting skill
(4) Affect conducting research
(5) Affect committee decision making
(6) market behavior

Question 27

6 behavior factors affect portfolio construction

Answer 27

(1) Inertia and default
(2) Naive Diversification
(3) Company stock: Investing in the familiar
(4) Excessive trading
(5) Home bias
(6) Behavioral Portfolio Theory

Question 28

initia and default (description, how to fix, pros & cons)

Answer 28

1. Description:
   + Happen for participant of DC plan
   + like status quo
   + not to change their asset allocation through the time
2. How to fix: autopilot (phi công tự lái)
   + automatically switch from risky asset to fixed income assets as the plan member near the intended retirement date
3. Disadvantages: it is one-size-fit-all solution -> not match the needs of specific sollution

Question 29

naive diversification (description, how to fix, pros & cons)

Answer 29

1. Description: use simple heuristic for allocate among available fund and framing bias
   + Participant use a 1/n naïve diversification strategy, dividing contributions equally among available funds irrespective of the underlying composition of the funds.
   + Participant use conditional 1/n strategy by allocating equally among their chosen subset of funds.
   + Participant may be to minimize future regret from one asset class beating the other

Question 30

Company Stock: Investing in the Familiar

Answer 30

Including:
(1) Familiarity and overconfidence effects
(2) Naïve extrapolation of past returns
(3) Framing and status quo effect of matching contributions
(4) Loyalty effects
(5) Financial incentives

Question 31

Familiarity and overconfidence effects

Answer 31

• Belong to company stock: investing in the familiar
• Underestimate risk because familiar with the emloying company and confidence in their estimate of company’s performance

Question 32

Naïve extrapolation of past returns

Answer 32

• Belong to company stock: investing in the familiar
• companies whose stock has done well in the past may expect this performance to continue -> wish to hold company stock

Question 33

Framing and status quo effect of matching contributions

Answer 33

• Belong to company stock: investing in the familiar
• When employer matching contributions are employer’s stock, employees tend to allocate their own contributions to employer’s stock

Question 34

Loyalty effects

Answer 34

• Belong to company stock: investing in the familiar
• Employees may be willing to hold employer’s stock to assist the company, as they perceive it

Question 35

Financial incentives

Answer 35

• Belong to company stock: investing in the familiar
• Employees may rationally invest in employer’s stock when there are financial incentives for them to do so (e.g., discount and tax benefits)

Question 36

Excessive trading

Answer 36

Investors with retail accounts appear to be more active traders.
+ Frequent traders not only
(1) have higher transaction costs because of excessive trading
(2) but also experience opportunity losses because of the disposition effect.
+ Excessive trading appears to be driven by fear of regret/regret aversion and overconfidence

Question 37

Home Bias

Answer 37

is the tendency of investors to invest a great portion of their funds in domestic assets. It is the result of information costs and behavioral biases, such as availability, confirmation, illusion of control, endowment, and status quo biases

Question 38

Behavioral Portfolio Theory

Answer 38

Belong to behavioral bias of portfolio construction

Question 39

How behavioral finance influences market behavior

Answer 39

1. Market anomalies
2. Momentum
3. Bubble & crash
4. Value stock outperform growth stock

Question 40

The mechanic of behavioral finance affect Investment process

Answer 40

(1) Investors types
(2) Behavior factors affect adviser-client relations
(3) Behavior factors affect portfolio construction
(4) Behavioral finance and analyst forecasts
(5) Behavioral factors affect commitee decision making
(6) Behavioral finance influences market behavior

Question 41

Characteristics of friendly follower

Answer 41

+ follow leads from their friends, colleagues, or advisers
+ want to be in the latest , most popular investments
+ tend to be cognitive
+ If emotional: regret aversion

Question 42

Characteristics of passive preservers

Answer 42

+ focus on financial security + preserving wealth rather than taking risks to grow wealth
+ obsess over short-term performance
+ slow to make investment decisions because not comfortable with change
+ focus on taking care of their family members and future generations
+ tend to be emotional
+ if cognitive: anchoring, mental accounting

Question 43

characteristics of independent individualist

Answer 43

+ strong-willed and independent thinkers
+ susceptible to acting on information
+ make an investment without consulting anyone
+ often resist following a financial plan
+ tend to be cognitive
+ if emotional: overconfidence, self-attribution

Question 44

characteristics of active accummulators

Answer 44

+ aggressive, strong-willed, and independent
+ want to be heavily involved in the investment decision-making process
+ quick decision makers but may chase higher risk investments
+ Bias: overconfidence, self-control, and illusion of control