Psychology Flashcards

1
Q

Heuristics

A

The act of enabling people to learn things on their own (combining baking soda and vinegar together to make a volcanos in science class)

In regards to finance, most people learn everything on their own and develop incorrect heuristics (cognitive bias)

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2
Q

January Effect

A

Calendar year related market anomaly where prices increase in the month of January
- main characteristic is buying stock before the end of the year and selling them in January

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3
Q

Anchoring

A

Tendency for investors to become attached to a specific price as the fair value of the holding
- holding on to a stock that you bought for $100 when it drops and waiting for it to get back to that price
- Force yourself to evaluate the investment like it was a new investment
- Also could be attaching to one fact

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4
Q

Attachment Bias

A

Holding onto investment for emotional reasons (attached to something)
- Grandfather left the stock

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5
Q

Availability Bias

A

Making decisions based on the information that is most readily available or easy to recall but not relevant to the current choice being made
- Not buying a car company stock due to them lying about stock and this is the first thing that comes up online

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6
Q

Cognitive Dissonance

A

The discord felt when investors make decisions contrary to their actual beliefs
- conservative investor puts all money in Crypto and then says they are aggressive investor

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7
Q

Confirmation Bias

A

Accept information that confirms our preconceived position or opinion and disregard information that conflicts

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8
Q

Diversification Errors

A

Investors tend to diversify evenly across any options that are given to them

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9
Q

Endowment Bias

A

Place more value on items you currently have - could be caused by emotional attachment
- Think you can sell stuff you have for more

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10
Q

Familiarity Bias

A

Customer buys based on their experience…. Buying apple stock because you own an iPhone

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11
Q

Fear of Regret

A

Tendency to take no action rather than risk making the wrong one

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12
Q

Flat Rate Bias

A

Tendency for people to prefer fixed payment streams versus variable ones

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13
Q

Gamblers Fallacy

A

Onset of certain event is less likely to happen after a series of events
- Picking red after seeing a lot of blacks on roulette

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14
Q

Herd Behavior

A

Tendency to mimic actions of a larger group or the opposite

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15
Q

Hindsight Bias

A

20/20 vision we think we have after an event thinking we understand it when we really dont
- Claiming to have known about the tech bubble

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16
Q

Loss Aversion and Risk Taking

A

Losses hurt more then the feeling you get when you get a gain
- having 50 and loosing 25 hurts more than just getting 25

17
Q

Mental Accounting

A

Looking at sums of money differently - all money is the same

18
Q

Overconfidence

A

Tendency to place to much emphasis on ones own abilities - often works hand and hand with confirmation bias

19
Q

Recency Bias

A

Tend to make decisions on the most recent information

20
Q

Representative Bias

A

Tendency to use stereotypes across situations that appear similar but are not

21
Q

Salience Bias

A

Place more emphasis on information that is more emotionally stimulating or vivid

22
Q

Self Affirmation Bias

A

When something goes right it’s because of you, but if something goes wrong its due to someone else

23
Q

Status Quo Bias

A

Tendency of investors to do nothing when action is actually called for

24
Q

Sunk Cost Fallacy

A

Tendency to keep an investment due to the resources committed to it

25
Paradox of Choice
More people will pick the default option as the amount of choices increase (less decisions when they have more choices)
26
Solving Biases: System 1 & System 2
**System 1** - Unconscious Response - Reaction - Intuitive - Instinctual - Emotional **System 2** - Conscious Choice - Decision - Cognitive - Educated - Rational
27
Solving Biases: Modifying the Decision Maker
#1: Move decision makers from system 1 to system 2. Reduced bias to help make their decisions more rational. - Typically educating clients - Try to improve the odds of this move; dont force it *Things to keep in mind* - Given them time - Have a planned approach - Teach the importance of taking a long term view - Use models, tools, graphs, plain English to make point #2: Once decision maker has moved to system 2, try to communicate the bias directly to them.
28
Sources of Money Conflict
Transparency between couples is important; view a couple as one client Potentially involve a professional
29
Workaholism
Workaholics feel better working; could lead to problems in personal life
30
Compulsive Buying Disorder
Impulse control buying (irresistible impulse); often coupled with eating disorder or drug abuse
31
Underspending
Underspending can cause negative financial and personal issue. Cause extreme anxiety about spending.
32
Financial Enmeshment
Putting a kid in the middle of an adult financial conversation; divorce. - could lead to bad behaviors for children
33
Financial Denial / Vow of Property
Denial: refusing to take action Vow of Property: thinking doing good for other and they will be taken care of without a plan
34
Role of Counseling in Financial Planning
Exterior (quantitative): balance sheet creation, cash flow statement, running projections for retirement, etc. Interior (qualitative): Internal - focuses on goals, dreams, fears, beliefs