Lecture 9 Flashcards Preview

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Flashcards in Lecture 9 Deck (13)
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1
Q

Premise of behavioural finance

A

Conventional financial theory ignores how real people make decisons

2
Q

Investors are irrational (2)

A
  • Don’t always process information correctly therefore make incorrect decisions
  • Make inconsistent/ systematically sub-optimal deicisions
3
Q

Errors in information processing

A

Can lead investors to mis-estimate the true probabilities of events/ returns

4
Q

Information processing > Forecasting errors

A

People place too much reliance on recent experiences when making forecasts (memory bias) therefore make extreme decisions

5
Q

Information processing > Overconfidence

A

Individuals over-estimate their abilities

6
Q

Self-attribution bias

A

Positive outcome > due to skill

Negative outcome > misfortune

7
Q

Information processing > Conservatism

A

Investors are too slow to update their beliefs in response to new evidence therefore under-react therefore prices fully reflect new information only gradually

8
Q

Information processing > Sample size neglect and representativeness

A

Don’t take sample size into account therefore take small sample as representation of the whole population and infer patterns too quickly

9
Q

Behavioural biases

A

Even if information processing is perfect individuals make less than rational decisions using the information

10
Q

Behavioural biases > framing

A

How opportunity is posed > framed as involving gains/ losses

11
Q

Behavioural biases > mental accounting

A

People segregate certain decisions eg one risky account and one safe, both park of the same portfolio

12
Q

Behavioural biases > regret avoidance

A

Individuals that make decisions that turn out badly have more regret when the decision was unconventional eg investing in new start up

13
Q

Behavioural biases > prospect theory

A

higher wealth provides a higher utility at a diminishing rate (graph)