ULOA Flashcards
A sub-field of behavioral economics, proposes that psychological influences and biases affect the financial behaviors of investors and financial practitioners.
Behavioral Finance
- how individual behave when it comes to finances/ investments or economic stuff.
- help understand why people make certain financial choices and how those choices can affect markets
BF
how psychological influences can affect market outcomes.
Behavioral Economics
one of the key aspects of behavioral finance studies
Influence of biases
affects decision making related to finances.
- Affects the financial market
Psychological factors/ influences
sources of all types of market anomalies and specifically market anomalies in the stock market, such as severe rises or falls in stock price.
Influences and biases
study the very specific ways our brain tend to stumble when making money decisions
Behavioral finance scientist
measure our ability to override our incorrect gut response and to engage our wiser more rational brain
Cognitive reflection
shows that most of us are pretty bad at taming our often-misguided instinctual brain
- Reveals the specific situations when we’re most likely to slip up and make a bad choice.
Behavioral finance research
propensity for people to allocate money for specific purposes.
- separate money for specific purposes
- subconscious/ conscious
• Mental accounting
people tend to mimic the financial behaviors of the majority of the herd.
• Herd behavior
decision making based on extreme emotions or emotional strains such as anxiety, anger, fear, or excitement. Oftentimes, emotions are a key reason why people do not make rational choices.
• Emotional gap-
attaching a spending level to a certain reference. (Examples : spending consistently based on a budget level or rationalizing spending based on different satisfaction utilities.) (budgeting money on groceries)
anchoring
- a tendency to make choices based on a confidence in self-based knowledge.
- Self-attribution usually stems from intrinsic confidence of a particular area. Within this category, individuals tend to rank their knowledge higher than others
- Tendency to make choices based on overconfidence in one owns knowledge or skill
- Intrinsic knack in a particular area (knows too much than others)
self attribution
- when investors sell their winners and hang onto their losers. Investors’ thinking is that they want to realize gains quickly.
- However, when an investment is losing money, they’ll hold onto it because they want to get back to even or their initial price. Investors tend to admit they are correct about an investment quickly (when there’s a gain). However, investors are reluctant to admit when they made an investment mistake (when there’s a loss).
- Stand in what I believe
- Tendency at any given point in
Disposition Bias
when investors have a bias toward accepting information that confirms their already-held belief in an investment.
Confirmation Bias -
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.
Experiential Bias
when investors place a greater weighting on the concern for losses than the pleasure from market gains.
• In other words, they’re far more likely to try to assign a higher priority on avoiding losses than making investment gain.
Loss Aversion -
when investors tend to invest in what they know, such as domestic companies or locally owned investments.
- Investors are not diversified across multiple sectors and types of investments, which can reduce risk.
- Investors tend to go with investments that they have a history with or have familiarity.
Familiarity Bias -
brain’s pesky tendency to believe that a random act is caused by another random act. (every now and then we’re winners in the market)
Illusory correction bias
- over value information that we recently read
losers
Recency Bias ¬
habits to recall events that never happened because it fits our narrative.
False Memory Bias
bias to over trust facts we can easily pull from memory
Availability heuristic bias
brains tendency to be widely wrong at estimating risks
Neglect of probability bias-
inclination to over trust the opinions of winners and discount the advice of those who loss.
Survivorship bias
states all equities are priced fairly based on all available public information is often debunked for not incorporating irrational and emotional behavior.
• that at any given time in a highly liquid market, stock prices are efficiently valued to reflect all the available information.
Efficient Market Hypothesis (EMT) -
