Gen Prin: Psych

Question 1

Framing

Answer 1

Show it as half empty or half full
Affects what person will decide

Question 2

Heuristic

Answer 2

an approach to problem solving that uses a shortcut or practical method

Question 3

Bias

Answer 3

irrational assumption or belief that gets in the way of our ability to make a decision based upon facts or our environment

Question 4

Anchoring

Answer 4

irrational bias towards and arbitrary figure, usually a purchase or listing price that impacts’ one decision making.
Ex. Won’t sell stock until price gets to where you bought it.
Or In negotiation - who offers the 1st number in the negotiation?

Question 5

Affinity bias

Answer 5

An unconscious bias that causes people to gravitate toward others who appear similar or have common characteristics.
Ex in hiring, brand loyalty, stock loyalty

Question 6

Availability bias

Answer 6

When we use information that is most available or vivid in our memory, as opposed to what is more representative.

Ex. fear of flying due to plane crash

Help clients see the forest vs one emotional tree

Question 7

Bandwagon effect

Answer 7

extent to which the demand for a commodity is increased due to the fact that others are also consuming the same commodity

Also herd instinct
Ex. Crypto! Market bubbles
Gains highlighted on social media while losses not reported

Question 8

Confirmation bias

Answer 8

human tendency to seek out evidence to support our beliefs, while simultaneously ignoring or failing to notice evidence that challenges those beliefs.

Question 9

Cognitive dissonance

Answer 9

discomfort associated with conflicting beliefs or data points
Or discomfort because you believe one thing and do another. Like you smoke even though you know it causes cancer. So you have discomfort over that

money corrupts ppl AND
I wish i had more money

shifting from accumulation to distribution - is this decumulaton?

Question 10

Endowment effect

Answer 10

an individual places a higher value on an object or investment that they already own than the value they would place if they did not own it.
ex. inherited stock or antique

Question 11

Disposition effect

Answer 11

selling assets that are gaining value while holding onto assets that are losing value

seek pride, avoid regret

Question 12

Familiarity

Answer 12

Leads some to buy single stock concentration

Favoring known quantities over what is new. When current situations appear similar to previous situation,we tend to regress to whatever state of mind we had previously held

employment decisions
selection of stocks from well known companies
favoring domestic investments

Question 13

Flat rate

Answer 13

preference to pay a flat rate as opposed to a per use approach even when the costs are equal to or greater than the actual usage

Question 14

Gambler’s fallacy

Answer 14

erroneous thinking that an event is more or less likely to happen based upon previous events.

Ex. flipped coin 5 times and it was heads so figure next time better chance of tails when it is still 50/50

Question 15

law of small numbers

Answer 15

someone makes sweeping generalizations about a group based upon the behaviors or other qualities of one or a small handful of people.

Question 16

Loss aversion

Answer 16

the pain of losing is much stronger than the joy of winning

difficult to admit loss so investors will sometimes go down with the ship!

wealthy are more wiling to admit loss than the middle class

Question 17

Mental accounting

Answer 17

Can lead to naive diversification. The assumption that simply investing in enough unrelated assets will reduce the risk sufficiently to make a profit

People tend to place different values on money based on biased criteria

easier to pay with card than w/d from savings
Categories based upon experiences or usage like retirement, college, vacation buckets

Question 18

Overconfidence

Answer 18

Overestimate our abilities and our level of control over a given situation

Illusion of control: a common instinct to overestimate their role is successful outcomes and to downlplay their part in failures

Question 19

Illusion of control

Answer 19

common in day trading, crypto trading and sports betting
favorable market conditions reinforce illusion of control

remind clients of ltd control over market and help them gain a longer term view of their financial plan

Question 20

Recency effect

Answer 20

tendency to best remember the information that was presented last

remember last item in a list, closing arguments in a trial
investors incorporate more recent events into their decision making

Question 20

Persuasion bias

Answer 20

susceptibility to making decisions based on social influence and the repetition of information

The more we hear it, the more we are likely to believe it.

Failure to fully account for the impact of information we hear repeatedly on the formation of our beliefs and behaviors

Question 21

Regret aversion

Answer 21

the crippling effect that comes from fearing a negative outcome

so they avoid making a decision altogether

Question 22

Representative heuristic

Answer 22

labeling something because of its connection to a larger group with similar characteristics

conflating a successful company with a successful stock holding

Question 23

Salience bias

Answer 23

Our tendency to focus on information that is most vivid

What is more salient may not be the most important

Question 24

Status quo bias

Answer 24

we tend to seek out the path of least resistance
primitive survival instinct

counteract
use automation to increase saving
schedule meeting immediately

Question 25

Sunk cost fallacy

Answer 25

our tendency to follow-through on something even though the costs outweigh the benefits

holding a stock too long

Question 26

When investors consider the past they tend to suffer from

Answer 26

House money effect
Like at a casino
you take more risk

Snakebite effect. Take less risk

Break even itis. Take more risk to break even

Question 27

Prospect theory

Answer 27

Stems from loss aversion.

When faced with gains investors are risk averse they want the sure thing

When faced with losses investors take risk they want the option with the lower risk of loss

Question 28

Money scripts

Answer 28

Learned behaviors and preferences that greatly impact your financial decisions

Question 29

Break even itis

Answer 29

Willing to take more risk to break even

Question 30

House money effect

Answer 30

Investors take more risk

Question 31

Snakebite effect

Answer 31

Investors take less risk

Question 32

Break Even itis

Answer 32

Investors take more risk