Psychological Approach to Beliefs

Question 1

what is narrow framing

Question 2

what is confirmation bias

Question 3

what is judgement heuristics

Question 4

what is prospect theory

Question 5

what is max prospect theory

Question 6

what is attribution theory

Question 7

how does confirmation bias work

Answer 7

when testing hypothesis, people look for confirming evidence

hypothesis -> evidence search -> belief

Question 8

what is bounded rationality

Answer 8

constraints of available time, information and cognitive capacity limit human abiity to make rational decisions

Question 9

what are heuristics and biases

Answer 9

mental shortcuts that help people make quick but less accurate decisions by focusing brains limited resources on most salient information

Question 10

what are the three core judgmental heuristics

Answer 10

representativeness, availability and anchoring

Question 11

what is representativeness heuristics

Answer 11

the more object x is similar to class y, the more likely we think x belongs to y

Question 12

what is availability heuristics

Answer 12

the easier it is to consider instances of class y, the more frequent we think it is

Question 13

what is anchoring heuristics

Answer 13

initial estimates values affect the final estimates, even after considerable adjustments

Question 14

what kind of heuristic is recency bias

Answer 14

availability heuristic

Question 15

example of representative heuristics

Answer 15

In financial markets, one example of this representative bias is when investors automatically assume that good companies make good investments. However, that is not necessarily the case. A company may be excellent at their own business, but a poor judge of other businesses.

Question 16

example of availability heuristic

Answer 16

prioritizing infrequent events based on recency and vividness. For example, plane crashes can make people afraid of flying. However, the likelihood of dying in a car accident is far higher than dying as a passenger on an airplane

Question 17

example of anchoring heuristic

Answer 17

if you first see a T-shirt that costs $1,200 – then see a second one that costs $100 – you’re prone to see the second shirt as cheap.

Question 18

question to avoid availability heuristic

Answer 18

is the most available memorable information a good guide to the true risk?

Question 19

question to avoid representative heuristic

Answer 19

is the resemblance of a person to a category a good guide to true ability?

Question 20

question to avoid anchoring heuristic

Answer 20

is the number that you start with an accurate representation or is it deliberate manipulation?

Question 21

what does representativeness lead to

Answer 21

1) non regressive prediction
2) extrapolation from small samples
3) perception of streaks in random walks (hot hand)
4) overconfidence when evidence is weak

Question 22

what does availability lead to

Answer 22

1) extreme prediction
2) prediction bias

Question 23

what does anchoring lead to

Answer 23

1) sticky bias from influential but irrelevant numbers/initial offering price
2) slow adjustment from misplacing
3) herd following from analysts
4) hindsight bias

Question 24

what do all three heuristics focus on

Answer 24

the most salient or attention getting info

Question 25

what do all three heuristics neglect

Answer 25

statistical information that controls how much you should use the salient info in prediction

Question 26

earliest application of heuristics in the market

Answer 26

Richard Thaler reasoned that long run trend of very good or bad stocks would be salient and lead people to predict that the trend would continue

Question 27

according to the behavioural approach, how does the strength weight model predict long term stock prices?

Who wins and loses?

Answer 27

overreaction (strong signal to investors)

thaler

winners lose, losers gain

Question 28

according to the behavioural approach, how does the strength weight model predict news when the news has strong predictive value?

Who wins and loses?

Answer 28

under reaction

winners win, losers loser