Chapter 01-02 Behavioral Finance Flashcards
Behavioral Finance CFAI Flashcards
Anchoring and adjustment
An information-processing bias in which the use of a psychological heuristic influences the way people estimate probabilities.
Anomalies
Apparent deviations from market efficiency.
Availability bias
An information-processing bias in which people take a heuristic approach to estimating the probability of an outcome based on how easily the outcome comes to mind.
Base-rate neglect
A type of representativeness bias (belief perserverence) in which the base rate or probability of the categorization is not adequately considered.
Behavioral finance macro
A focus on market level behavior that considers market anomalies that distinguish markets from the efficient markets of traditional finance.
Behavioral finance micro
A focus on individual level behavior that examines the behavioral biases that distinguish individual investors from the rational decision makers of traditional finance.
Cognitive cost
The effort involved in processing new information and updating beliefs.
Cognitive dissonance
The mental discomfort that occurs when new information conflicts with previously held beliefs or cognitions.
Cognitive errors
Behavioral biases resulting from faulty reasoning; cognitive errors stem from basic statistical, information processing, or memory errors. Moderate with better information processing (structure, process), awareness.
Confirmation bias
A belief perseverance bias in which people tend to look for and notice what confirms their beliefs, to ignore or undervalue what contradicts their beliefs, and to misinterpret information as support for their beliefs.
Conjunction fallacy
An inappropriate combining of probabilities of independent events to support a belief. In fact, the probability of two independent events occurring in conjunction is never greater than the probability of either event occurring alone; the probability of two independent events occurring together is equal to the multiplication of the probabilities of the independent events.
Conservatism bias
A belief perseverance bias in which people maintain their prior views or forecasts by inadequately incorporating new information.
Disposition effect
As a result of loss aversion, an emotional bias whereby investors are reluctant to dispose of losers. This results in an inefficient and gradual adjustment to deterioration in fundamental value.
Emotional biases
Behavioral biases resulting from reasoning influenced by feelings; emotional biases stem from impulse or intuition. Emotional biases must be adapted as they are more difficult to correct.
Endowment bias
An emotional bias in which people value an asset more when they hold rights to it than when they do not.
Framing
An information-processing bias in which a person answers a question differently based on the way in which it is asked (framed).
Framing bias
An information-processing bias in which a person answers a question differently based on the way in which it is asked (framed).
Gamblers’ fallacy
A misunderstanding of probabilities in which people wrongly project reversal to a long-term mean.
Halo effect
An emotional bias that extends a favorable evaluation of some characteristics to other characteristics.
Herding
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.
Hindsight bias
A belief perserverence bias with selective perception and retention aspects in which people may see past events as having been predictable and reasonable to expect.
Home bias
A preference for securities listed on the exchanges of one’s home country.
Illusion of control
A belief perserverence bias in which people tend to believe that they can control or influence outcomes when, in fact, they cannot. Illusion of knowledge and self-attribution biases contribute to the over confidence bias.
Loss-aversion bias
An emotional bias in which people tend to strongly prefer avoiding losses as opposed to achieving gains.
Mental accounting bias
An information-processing bias in which people treat one sum of money differently from another equal-sized sum based on which mental account the money is assigned to.
Overconfidence bias
An emotional bias in which people demonstrate unwarranted faith in their own intuitive reasoning, judgments, and/or cognitive abilities.
Regret
The feeling that an opportunity has been missed; typically an expression of hindsight bias.
Regret-aversion bias
An emotional bias in which people tend to avoid making decisions that will result in action out of fear that the decision will turn out poorly.
Representativeness bias
A belief perseverance bias in which people tend to classify new information based on past experiences and classifications.
Sample-size neglect
A type of representativeness bias (belief perserverence) in which financial market participants incorrectly assume that small sample sizes are representative of populations (or “real” data).
Self-attribution bias
A bias (other) in which people take personal credit for successes and attribute failures to external factors outside the individual’s control.
Self-control bias
An emotional bias in which people fail to act in pursuit of their long-term, overarching goals because of a lack of self-discipline.
Social proof
A bias (other) in which individuals tend to follow the beliefs of a group.
Status quo bias
An emotional bias in which people do nothing (i.e., maintain the “status quo”) instead of making a change.
