Exam prep Flashcards
What is the mathematical assumption associated with the representative heuristic?
P(A|B) = P(B|A)
What is the representative heuristic?
The school of thought decision making that assumes the attributes of a parent group can be associated with any member or partial member of that group.
What is Bayes theorem?
P(A|B) = P(B|A)*P(A)/P(B)
What are the three key outcomes of overconfidence? (w.r.t. finance)
1) Overestimate knowledge
2) Underestimate risk
3) Overestimate their ability to control events
What are bubbles?
Speculative frenzy driving up prices followed by an inevitable ‘burst’ and market crash.
What are feedback loops?
A single initial event apparently self justifying it’s own repetition in greater volumes.
What is the relationship between a bubble’s growth rate and it’s size?
A bubble’s growth rate is directly related to it’s size.
What fallacious mathematical trend type is typically used by the unthinking and unwashed masses when discounting future cash flows?
A hyperbolic trend, with near future discount rates much higher. Experiment with price difference between today to tomorrow versus 365 and 366 days from now. Much smaller difference in one years time.
Describe the three basic tenants of prospect theory.
1) Edit decision to make it more easily process by decomposing it into a riskless and a risky part.
2) Typically involves a benchmarking process
3) Benchmarking can lead to errors
Describe how Benchmarking in prospect theory can lead to errors.
If someone is just trying to reach a benchmark and then stop then they will work longer in less profitable times and shorter in more profitable times leading to an inefficient earnings/effort ratio.
What is the finding of prospect theory w.r.t. risk averse/seeking behaviour?
People will avoid risks in search of profit and take risks to avoid losses (typically)
Does increasing income increase happiness on average?
No, not once a subsistence threshold has been passed.
Where in the brain are good feelings experienced? Where are bad feelings experienced?
Good = left side behind forehead Bad = Right side behind forehead
What are the three happiness factors and their relative weightings?
1) Genetics (50%)
2) Intentional Activity (40%)
3) Circumstances (10%)
What is masked priming?
The exposure of a subject to words in a masked fashion and for less time than the conscious brain can process it. Can be shown that subconscious brain still processes it.
Name three measurable effects of Masked priming.
1) Increased electrical activity and blood flow in the brain.
2) Demonstrable semantic link.
3) Not confined to sensory programming as also includes covert motor programming.
Who or what are noise traders?
Traders with erroneous or stochastic beliefs ignorant of or untroubled by the typical laws that are thought to govern markets and economics.
What effect can large volumes of noise traders have?
They can cause a divergence from expected market returns and potentially also can earn above the expected market return.
What are the five key dimensions of personality?
1) Extraversion
2) Neuroticism
3) Conscientiousness
4) Agreeableness
5) Openness
What are the key features of:
1) Extraversion
2) Neuroticism
3) Conscientiousness
4) Agreeableness
5) Openness
1) Response to reward
2) Response to threat
3) Response inhibition
4) Regard for others
5) Breadth of mental associations
What is probability matching and what desire drives it in humans?
Noticing a trend between two or more things and ‘guessing’ each thing in line with it’s recurrence probability rather than employing an optimal strategy. Driven by a desire to find a pattern and thus divine total reward.
