Gen Prin: Psych Flashcards
Framing
Show it as half empty or half full
Affects what person will decide
Heuristic
an approach to problem solving that uses a shortcut or practical method
Bias
irrational assumption or belief that gets in the way of our ability to make a decision based upon facts or our environment
Anchoring
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?
Affinity bias
An unconscious bias that causes people to gravitate toward others who appear similar or have common characteristics.
Ex in hiring, brand loyalty, stock loyalty
Availability bias
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
Bandwagon effect
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
Confirmation bias
human tendency to seek out evidence to support our beliefs, while simultaneously ignoring or failing to notice evidence that challenges those beliefs.
Cognitive dissonance
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?
Endowment effect
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
Disposition effect
selling assets that are gaining value while holding onto assets that are losing value
seek pride, avoid regret
Familiarity
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
Flat rate
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
Gambler’s fallacy
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
law of small numbers
someone makes sweeping generalizations about a group based upon the behaviors or other qualities of one or a small handful of people.
Loss aversion
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
Mental accounting
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
Overconfidence
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
Illusion of control
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
Recency effect
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
Persuasion bias
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
Regret aversion
the crippling effect that comes from fearing a negative outcome
so they avoid making a decision altogether
Representative heuristic
labeling something because of its connection to a larger group with similar characteristics
conflating a successful company with a successful stock holding
Salience bias
Our tendency to focus on information that is most vivid
What is more salient may not be the most important
Status quo bias
we tend to seek out the path of least resistance
primitive survival instinct
counteract
use automation to increase saving
schedule meeting immediately
Sunk cost fallacy
our tendency to follow-through on something even though the costs outweigh the benefits
holding a stock too long
When investors consider the past they tend to suffer from
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
Prospect theory
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
Money scripts
Learned behaviors and preferences that greatly impact your financial decisions
Break even itis
Willing to take more risk to break even
House money effect
Investors take more risk
Snakebite effect
Investors take less risk
Break Even itis
Investors take more risk
