Behavioral Finance Flashcards
(50 cards)
What does behavioral finance study?
Behavioral finance studies how psychology influences financial decisions.
Are people always rational investors?
No, people are not always rational investors—emotions affect their choices.
What is loss aversion?
Loss aversion is the tendency for people to fear losses more than they value gains.
How does losing $100 compare to gaining $100?
Losing $100 feels worse than gaining $100 feels good.
What is overconfidence bias?
Overconfidence bias is when people believe they’re better at investing than they really are.
What do overconfident investors tend to do?
Overconfident investors trade more and often perform worse.
What is herd behavior?
Herd behavior is when people copy others, especially in uncertain markets.
What can herd behavior cause?
It can cause bubbles (like crypto or meme stocks) and crashes.
What role did herd mentality and overconfidence play in the 2008 crash?
The 2008 crash partly happened because of herd mentality and overconfidence.
What is anchoring?
Anchoring is relying too much on the first piece of info, like a stock’s past price.
How does anchoring affect investors?
Investors might not sell because they ‘paid more for it’ even if it’s falling.
What is mental accounting?
Mental accounting is when people treat money differently based on its source.
Give an example of mental accounting.
Example: spending a bonus differently than regular salary.
What is confirmation bias?
Confirmation bias is only looking for info that supports your opinion.
What does confirmation bias lead to?
It leads to bad decision-making and echo chambers in investing.
What is prospect theory?
Prospect theory states that people value gains and losses differently, not just final outcomes.
Who developed prospect theory?
Prospect theory was developed by Daniel Kahneman & Amos Tversky.
What recognition did Kahneman receive?
Kahneman won a Nobel Prize in Economics for prospect theory.
What is status quo bias?
Status quo bias is the preference for things to stay the same, even if change is better.
How does status quo bias affect investors?
Investors might hold on to bad assets to ‘avoid making a change’.
What is the disposition effect?
The disposition effect is selling winners too soon and holding losers too long.
What drives the disposition effect?
It is based on emotion, not logic. People hate realizing a loss.
What is recency bias?
Recency bias is when recent events weigh more heavily in decision-making.
Give an example of recency bias.
Example: thinking a rising stock will keep going up forever (spoiler: it doesn’t).
