Investment Beahvioral Finance
Behavioral Finance / Bahavioral Bias
Behavioral Finance / Bahavioral Bias
Set of flashcards Details
| Flashcards | 51 |
|---|---|
| Language | English |
| Category | Finance |
| Level | University |
| Created / Updated | 15.01.2022 / 17.10.2023 |
| Licencing | Not defined |
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Why is the utility function in Prospect theory convex on the left of the origin?
The convexitiy on the left origin of the utility function indicates risk seeking behaviors when losses occur.
Cognitive Errors
- Conservatism
- Aversion to ambiguity
- Confirmation
- Representativenes
- Illusion of control
- Hindsight
- Disjunction
Information Processing
- Anchoring
- Mental accounting
- Framing
- Overreaction
- magical thinking
- sunk cost
- forecasting error
- overreaction and availability
Emotional Bias
- Loss aversion
- Overconfidence
- Self control
- Status Quo
- Endowment
- Regret aversion
- Naive Diversification
Other Bias
- Gambler's Fallacy
- Herd behaviour
Conservatism Bias
People tend to overweight the base rates and underweight the new information, resulting in revised beliefs about probabilities and outcomes that demonstrate an under-reaction to the new information.
- Many people become anchored to their ideas and will not update their expectations when new information arrives (anchoring bias)
- Only tentative and insufficient reaction to news
- This underreaction to news leads to momentum in stock returns (initial under-reaction).
Aversion to Ambiguity Bias
People prefer the familiar to the unfamiliar.
An investment manager with deeper knowledge and experiences in bonds prefers the certainty of bond cash flows to the uncertainty of risk asset cash flows, even though investors might receive appropriately higher returns for assuming that risk.
Confirmation Bias
People give more weight to evidence that (1) supports their beliefs and (2) ignore or modify evidence that conflicts with their beliefs.
“Human Ratio” behind it:
- faulty reasoning - easily corrected
- feelings - harder to correct
