Lecture 6 Flashcards
Ethics, cheating & investment behavior
money illusion
it is logical to think about money in terms of buying power (real dollars), rather than the arbitrary unit of a dollar (nominal dollars), which changes in value as a result of inflation.
concerned about the outcomes of others
people are concerned about how their own rewards compare the wards of others.
fairness
fairness concerns can be costly. People are entitled to their own assessment of fairness. However, we must all realize that others may have very different standards about what is fair.
“bounded ethicality”
Bounded ethicality comes into play when an executive makes a decision that not only harms others but also is inconsistent with his or her conscious beliefs and preferences.
overclaiming
Even honest people tend to believe they contributed more to an enterprise than they actually did.
In-group favouritism
In addition, we are more comfortable doing favours for those with whom we identify than for those noticeably different from us. Thus, we tilt toward helping people who share our nationality, religion, race, gender, or alma mater. without recognizing the harm that these favours may create for out-group members.
Implicit attitudes
his view is challenged by research on implicit attitudes, which shows that when we meet someone, our minds automatically activate stereotypes of the person’s race, sex, and age.
Indirectly unethical behaviour
compared two options: a company raises its price from $3 to $9, or a company sells their product to another company which raises the price to $15. People tend to find the first option more unethical than the latter.
Overconfidence produces excessive trading
Overconfidence is especially pertinent to stock-market investing strategies. The expenses associated with owning individual stocks are largely created by the costs of buying and selling them.
Denying that random events are random
People tend to deny that random events are random and find patterns where none exist. When investors are led to believe that a specific fund is “hot”, they will become more willing to pay the fees associated with active investing.
Prospect theory
is a behavioral model that shows how people decide between alternatives that involve risk and uncertainty (e.g. % likelihood of gains or losses). It demonstrates that people think in terms of expected utility relative to a reference point (e.g. current wealth) rather than absolute outcomes.
