Chapter 9 - Behavioral Finance and Technical Analysis

Question 0

Name the four important errors in Information Processing.

Answer 0

1. Forecasting Errors.
2. Overconfidence.
3. Conservatism.
4. Sample-size neglect and representativeness.

Question 1

Models of financial markets that emphasize potential implications of psychological factors affecting investor behavior.

Answer 1

Behavioral Finance

Question 2

Investors are too slow (too conservative) in updating their beliefs in response to recent evidence.

Answer 2

Conservatism Bias

Question 3

People are too prone to believe that a small sample is representative of a broad population and infer patterns too quickly.

Answer 3

Representativeness bias

Question 4

What are the four behavioral biases?

Answer 4

1. Framing.
2. Mental Accounting.
3. Regret Avoidance.
4. Prospect theory.

Question 5

Decisions are affected by how choices are posed, for example, as gains relative to a low baseline level or losses relative to a higher baseline.

Answer 5

Framing.

Question 6

A specific form of framing in which people segregate certain decisions.

Answer 6

Mental Accounting

Question 7

People blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions.

Answer 7

Regret Avoidance

Question 8

Behavioral theory that investor utility depends on gains or losses from investors’ starting position, rather than on their levels of wealth.

Answer 8

Prospect Theory

Question 9

The extent to which movements in broad market indexes are reflected widely in movements of individual stock prices.

Answer 9

Breadth

Question 10

Recent performance of a given stock or industry compared to that of a broader market index.

Answer 10

Relative Strength

Question 11

The ration of average volume in declining issues t average volume in advancing issues.

Answer 11

Trin Statistic

Question 12

Ratio of the yield of top-rated corporate bonds to the yield of intermediate-grade bonds.

Answer 12

Confidence Index

Question 13

The total number of shares currently sold short in the market.

Answer 13

Short Interest

Question 14

Ratio of put options to call options outstanding on a stock.

Answer 14

Put/Call Ratio

Question 15

Closed-end funds ______________ net asset value.

Answer 15

often sell at substantial discounts from or premiums above

Question 16

Behavioral finance models explain investor’s preference for cash dividends as a consequence of ______________.

Answer 16

mental accounting

Question 17

When a stock’s market price breaks through its moving average line from below, a technical analyst interprets this as ______________.

Answer 17

a bullish signal

Question 18

A relatively low value of Barron’s confidence index is ______________.

Answer 18

a bearish signal

Question 19

When stock price falls below a support level, technical analysts interpret this as ______________.

Answer 19

a bearish signal

Question 20

One of the limits on investors’ ability to exploit the mistakes of behavioral investors is fundamental risk, which is ______________.

Answer 20

the possibility that mispricing will worsen

Question 21

If stock advances exceed declines by a wide margin, then technical analysts perceive the market as ______________.

Answer 21

stronger because of the widespread movement