Chapter 6 (Market Efficiency & Behavior)

Question 1

Investors are risk averse when choosing among alternatives that will produce a gain but risk seeking when choosing among alternatives that will produce a loss.

Answer 1

Prospect Theory

Question 2

This is the use of immaterial information in making investment decisions. For example, investors have been shown to make buy or sell decisions based on an anchored price, such as a round number like $100 or the original purchase price of the shares.

Answer 2

Anchoring

Question 3

This is the process of ignoring or discounting any new information that is not consistent with the fundamental view the investor has of the company.

Answer 3

Cognitive Dissonance

Question 4

This is an assessment by investors of new information or decisions based on superficial traits rather than fundamental analysis. For example, investors have been shown to bid up the price of a firm’s equity after a name change.

Answer 4

Representativeness

Question 5

This is the mistaken notion that the onset of an outcome either increases or decreases the probability of that outcome occurring again.

Answer 5

Gambler’s Fallacy

Question 6

This occurs when investors make decisions based on individual mental categories, which can be unique to each investor.

Answer 6

Mental Accounting

Question 7

The date of payment is the date on which the dividend will actually be paid. Remember that the dividend will be paid to those who owned the shares as of the date of record.

Answer 7

Payment Date