Lesson 2: Introduction to Behavioral Finance

Question 1

refers to the propensity for people to allocate money for specific purposes.

Answer 1

Mental accounting

Question 2

states that people tend to mimic the financial behaviors of the majority of the herd.

Answer 2

Herd Behavior

Question 3

refers to decision-making based on extreme emotions or emotional strains such as anxiety, anger, fear, or excitement.

Answer 3

Emotional gap

Question 4

refers to attaching a spending level to a certain reference. Examples may include spending consistently based on a budget level or rationalizing spending based on different satisfaction utilities.

Answer 4

Anchoring

Question 5

refers to a tendency to make choices based on overconfidence in one’s own knowledge or skill.

Answer 5

Self attribution

Question 6

is when investors have a bias toward accepting information that confirms their already-held belief in an investment.

Answer 6

Confirmation bias

Question 7

occurs when investors’ memory of recent events makes them biased or leads them to believe that the event is far more likely to occur again.

Answer 7

Recency bias

Question 8

occurs when investors place a greater weighting on the concern for losses than the pleasure from market gains.

Answer 8

Loss aversion

Question 9

is when investors tend to invest in what they know, such as domestic companies or locally owned investments.

Answer 9

Familiarity bias

Question 10

says that at any given time in a highly liquid market, stock prices are efficiently valued to reflect all the available information.

Answer 10

Economic Market Hypothesis

Question 11

Enumerate Main Concepts of Behavioral Finance

Answer 11

(1) Mental Accounting
(2) Herd Behavior
(3) Emotional Gap
(4) Anchoring
(5) Self Attribution