Chapter 29 CAIA Flashcards - Cases in Tail Events

Question 1

Behavioural Finance

Answer 1

Behavioral finance studies the potential impacts of cognitive, emotional, and social factors on financing decision-making.

Question 2

Confirmation Bias

Answer 2

Confirmation Bias is the tendency to disproportionately interpret results that confirm a previously held opinion as being true.

Question 3

Anchoring

Answer 3

Anchoring may be viewed in this context as a tendency to rely too heavily on previous beliefs.

Question 4

Behavioral Biases

Answer 4

Behavioral biases are tendencies or patterns exhibited by humans that conflict with prescriptions based on rationality and empiricism. Behavioral biases are generally viewed as important explanations for some investment behavior and often conflict with rational long-term investment decision-making.

Question 5

Unwind Hypothesis

Answer 5

The unwind hypothesis suggests that hedge fund losses began with the forced liquidation of one or more large equity market-neutral portfolios, primarily to raise cash or reduce leverage.

Question 6

Crowded Trade

Answer 6

When large investors hold substantial positions in the same asset or similar assets, it is known as a crowded trade. Crowded trades are viewed as risky positions due to the relatively large potential for massive sell orders or buy orders placed by investors at approximately the same time.

Question 7

Spoofing

Answer 7

Spoofing is the placing of large orders to influence market prices with no intention of honoring the orders if executed.

Question 8

Circuit Breaker

Answer 8

A circuit breaker is a decision rule and procedure wherein exchange authorities invoke trading restrictions (even exchange closures) in an attempt to mute market fluctuations and to give market participants time to digest information and formulate their trading responses.

Question 9

Affinity Fraud

Answer 9

Affinity fraud is the commission of fraud against people or entities with which the perpetrator of the fraud shares a common bond, such as race, ethnicity, or religious affiliation.

Question 10

Window Dressing

Answer 10

Window dressing is a term used in the investment industry to denote a variety of legal and illegal strategies to improve the outward appearance of an investment vehicle.

Question 11

Painting the Tape

Answer 11

Placing transactions to record high or low prices on the transaction records of public markets is a fraudulent activity often termed painting the tape, in reference to the historical use of ticker tape to broadcast prices.