III. PORTFOLIO THEORY AND BEHAVIORAL FINANCE -- B. Behavioral Finance Theory

Question 1

Affinity

Answer 1

Make irrationally uneconomical consumer choices or investment decisions based on how you believe a certain product or service will reflect your values.

Question 2

Anchoring

Answer 2

Occurs when investors are influenced by purchase points or arbitrary price levels and cling to these numbers as they decide whether to buy or sell an investment.

Question 3

Availability

Answer 3

A mental shortcut that causes people to estimate the probability of an outcome based on how prevalent or familiar that outcome appears in their lives.

Question 4

Cognitive dissonance

Answer 4

The mental discomfort we feel when newly acquired information conflicts with preexisting understandings.

Question 5

Confirmation

Answer 5

Cherry pick data to support a thesis, rather than objectively analyzing.

Question 6

Conservatism

Answer 6

Emphasize original information more than new information, underreact to new information, and ignore information that is not consistent with our own view of the world.

Question 7

Endowment

Answer 7

Assign greater value to an object you possess and may lose than an object of the same value that you don?t possess and have the potential to gain.

Question 8

Framing

Answer 8

Tendency to respond to situations differently based on the context in which a choice is presented.

Question 9

Herding

Answer 9

Buying when everyone else buys and/or when share price is rising, and vice versa.

Question 10

Hindsight

Answer 10

Tendency to view events as having been more predictable, and thus actions more correct or incorrect, than was apparent as the situation was unfolding, which gives a false sense of security and can lead to excessive risk-taking.

Question 11

Home country

Answer 11

Tendency to be more attracted to investments in domestic markets.

Question 12

Illusion of control

Answer 12

Tendency to believe we can control or influence outcomes that we cannot.

Question 13

Loss aversion

Answer 13

Feeling greater pain for a loss than for a gain.

Question 14

Mental accounting

Answer 14

When people treat various sums of money differently based on where these sums are mentally categorized.

Question 15

Outcome

Answer 15

De-emphasize the events preceding the outcomes and over-emphasize the outcome, which results in the quality of the decision being judged solely on its eventual outcome.

Question 16

Overconfidence

Answer 16

Unwarranted faith in your own thoughts and abilities. The belief that you can control random events by acquiring more information and consider your abilities to be better than they actually are.

Question 17

Recency

Answer 17

We recall recent information more easily than information obtained further in the past and potentially extrapolate recent patterns where none exist.

Question 18

Regret aversion

Answer 18

The tendency to do nothing due to the fear of making the wrong decision, and the tendency to allow regret for a previous decision to affect future ones.

Question 19

Representativeness

Answer 19

Arriving at a conclusion without doing a thorough analysis. Processing new information using pre-existing ideas or classic models.

Question 20

Self-attribution

Answer 20

Take credit for good outcomes and pass on the blame for bad outcomes.

Question 21

Self-control

Answer 21

Tendency to consume today at the expense of saving for tomorrow.

Question 22

Status quo

Answer 22

Tendency to stay with current investments, faced with an array of options, select the one that keeps conditions the same.