Psychology Flashcards
The tendency to place more value on items an investor already owns than items they do not. Has more to do with TIME of ownership.
endowment bias (divestiture aversion)
The tendency to make decisions based on HOW information is presented, which can be a narrow scope, rather than a full set of facts
framing
The tendency to disregard probability when making a decision under uncertainty
neglect of probability bias
The tendency to use stereotypes across all situations and investments that appear to be similar but are not the same
representative bias
An individual erroneously believes that the onset of a certain random event is less likely to happen following an event or series of events
gambler’s fallacy (monte carlo fallacy)
Gambler’s fallacy is also called:
monte carlo fallacy
The 20/20 vision we have when looking at a past event and thinking we understand it
hindsight bias (creeping determinism or knew-it-all-along effect)
The tendency to make decisions based on small sets of data or limited information
law of small numbers (approximation)
Mental accounting is also called:
psychological accounting
Entails looking at sums of money differently, depending on their source of intended use
mental accounting (psychological accounting)
Sunk cost fallacy is also called:
concorde fallacy
The tendency to place too much emphasis on one’s own abilities
overconfidence
The tendency to keep an investment based on resources committed to it (keep putting money into losers)
sunk cost fallacy (concorde fallacy)
Investors are risk-averse when it comes to gains (don’t want to give them up) and risk seekers with losses (will take big risks to avoid them). People will opt for a SURE GAIN rather than a chance to win more
prospect theory (disposition effect or loss aversion)
Judges merits of a decision solely on its outcome vs. the quality of a decision at the time
outcome bias
The tendency for people to prefer fixed payments vs. variable ones
flat rate bias
Endowment bias is also called:
divestiture aversion
A tendency for investors to make decisions based on the most repeated news they hear, even if those facts are incorrect or irrelevant
persuasion bias (social influence)
Recency bias is also called:
experiential bias
Loss aversion is also:
disposition effect or prospect theory
The bias where we tend to make decisions based on the most readily available information (but not necessarily the most relevant). Typically information learned via heuristics or information that was often repeated
availability bias
Confirmation bias is also called:
congeniality bias
The tendency to take no action rather than risk taking the wrong one
fear of regret
Anchoring is also called:
focalism
What are the main characteristics of the January Effect?
- an increase in buying securities before Dec. 31
- selling in January to generate a profit
The act of enabling people to learn things on their own
heuristics
The tendency to accept any information that confirms our preconceived position and disregard any information that does not support that position
confirmation bias (congeniality bias)
The discord that occurs when investors make decisions contrary to their actual beliefs
cognitive dissonance
Investors can be prone to making decisions based on an investment having an attractive story behind it
narrative fallacy
The tendency to place more meaning on facts that are more emotionally stimulating or vivid
salience bias
Persuasion bias is also called:
social influence
The tendency to make decisions based on the most recent information available
recency bias (experiential bias)
Investors attaching to a specific price or to any fact regarding an investment
anchoring (focalism)
Drawing incorrect conclusions from misguided heuristics
cognitive bias
Hindsight bias is also:
knew-it-all-along effect or creeping determinism
Law of small numbers is also called:
approximation
