Phenomena Flashcards
Prospect theory (major ingredients)
1) Reference point (gains vs. losses)
2) Impact of loss aversion
3) Diminishing sensitivity
4) Application of probability weighting
Possibility effect
Overweighting small probabilities
Certainty effect
Underweighting high probabilities relative to certainty
Mental accounting
Set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities
Proportion of Gains realized (DE)
realized gains / (realized gains + paper gains)
Proportion of losses realized (DE)
realized losses / (realized losses + paper losses)
Disposition effect (aspects)
- Prospect theory
- Alternative behavior theory
- Taxes
two key findings of the Mental accounting paper
- Matching contribution drops after they people have to make an active choice in ES.
- Inertia in both cases
Inertia
Tendency to stick to the status quo
Heuristics
Mental shortcut or a rule of thumb
Representativeness
Judgement based on similarity (stereotyping)
Availability
Judgement based on the ease with which an event can be brought to mind
Anchoring (and adjustment)
Judgement based on some initial starting point.
Familiarity
Choice influence by a preference for the familiar
Affect
Choice based on an immediate emotion
Ambiguity aversion
People generally prefer to bet on known [=risk] rather than unknown probabilities [=uncertainty]
Proximity bias
Overweighting of investments one is/feels close to
Examples of proximity bias
1) Industry bias
2) Home Bias
3) Local Bias
4) Own-company bias
