Introduction

Question 1

“People in Traditional Finance are rational. People in Behavioral Finance are normal.”

Answer 1

Mier Statman, Ph.D.

Question 2

Behavioral finance as behavioral economics and is further defined as combining the twin discipline of psychology and economics to explain why and how people make seemingly irrational or illogical decisions, and why they save, invest, spend, and borrow money.

Answer 2

Belsky and Gilowich (1999)

Question 3

Behavioral finance tries to understand how people forget fundamentals and make investments based on emotions.

Answer 3

Verma (2004)

Question 4

asserts that behavioral finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets.

Answer 4

Swell (2005)

Question 5

2 Categories of Irrationalities

Answer 5

1. Investors do not always process information correctly.
2. Even when given a probability distribution of returns, investors may make inconsistent or suboptimal decisions.

Question 6

Examines behaviors or biases of individual investors that distinguish them from the rational actors envisioned in classical economic theory.

Answer 6

BFMI

Question 7

Detects and describe anomalies in the efficient market hypothesis that behavioral models may explain.

Answer 7

BFMA

Question 8

MODERN BEHAVIORAL FINANCE

Answer 8

Dr. Daniel Kahneman and
Dr. Amos Tversky

“The Brilliant Pair”

Question 9

PSYCHOGRAPHIC MODELS USED IN BEHAVIORAL FINANCE

Answer 9

Two studies—Barnewall (1987) and Bailard, Biehl, and Kaiser (1986) —apply useful models of investor psychographics

Question 10

One of the oldest and most prevalent psychographic investor models, based on the work of Marilyn MacGruder Barnewall, was intended to help investment advisors interface with clients. Barnewall distinguished between two relatively simple investor types:
Passive Investors

Active Investors

Answer 10

Barnewall Two-Way Model

Question 11

General Type

Answer 11

Passive Investors
Active Investors

Question 12

Investors Type

Answer 12

Conservative
Moderate
Growth
Aggressive

Question 13

Bias Types

Answer 13

Primarily Emotional
Primarily Cognitive

Question 14

Behavioral Investment Types

Answer 14

Passive Preserver
Friendly Follower
Independent Individualist
Active Accumulator

Question 15

Passive Preserver

Answer 15

Inherit the money, not earned
“Worrires”
careful not to take excessive risk
Family

Question 16

Friedly Follower

Answer 16

Do not have their ideas about investing

They follow the lead of their friends

education on the benefits of portfolio diversification

Question 17

Independent Individualist

Answer 17

“trust their gut”

Initial information rather than corroborational

Although they are busy people, still they will reject financial Advice

contrarian

Question 18

Active Accumulator

Answer 18

“The Most Aggressive”

Strong willed and confident

They always hope for high return

Question 19

Investment Type

Answer 19

Direct Equity Investments
Equity Funds
Hedge Funds
Bonds (Government or Corporate)
Derivatives
Real Estate
Pension Funds
Gold

Question 20

Adventurer

Answer 20

Direct Equity Investments,
Equity Funds
Hedge Funds

Question 21

Celebrity

Answer 21

Direct Equity,
Bonds
Equity Funds

Question 22

Individualist

Answer 22

Derivatives,
Direct Equity, Real Estate

Question 23

Guardian

Answer 23

Bonds
Pension Funds
Gold

Question 24

Straight Arrow

Answer 24

All Investments including Equity, Bonds and Gold

Question 25

People who are willing to put it all on one bet and go for it because they have confidence. They are difficult to advise because they have their own ideas about investing. They are willing to take risks, and they are volatile clients from an investment counsel point of view.

Answer 25

Adventurer

Question 26

These people like to be where the action is. They are afraid of being left out. They really do not have their own ideas about investments. They may have their own ideas about other things in life, but not investing. As a result, they are the best prey for maximum broker turnover

Answer 26

Celebrity

Question 27

These people tend to go their own way and are typified by the small business person or an independent professional, such as a lawyer, CPA, or engineer. They try to make their own decisions in life, carefully going about things, and having a certain degree of confidence about them, but also being careful, methodical, and analytical. These are clients whom everyone is looking for—rational investors with whom the portfo?lio manager can talk sense

Answer 27

Individualist

Question 28

Typically, as people get older and begin considering retirement, they approach this personality profile. They are careful and a little bit worried about their money. They recognize that they face a limited earning time span and have to preserve their assets. They are definitely not interested in volatility or excitement. Guardians lack confidence in their ability to forecast the future or to understand where to put money, so they look for guidance.

Answer 28

Guardian

Question 29

These people are so well balanced, they cannot be placed in any specific quadrant, so they fall near the center. On average this group of clients is the average investor, a relatively balanced composite of each of the other four investor types, and by implication a group willing to be exposed to medium amounts of risk

Answer 29

Straight Arrow