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Behavioural FInance Flashcards

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1
Q

What is Process 1 in decision-making?

A

Automatic, intuitive, fast

Susceptible to perceptual, learning, and cognitive biases.

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2
Q

What is Process 2 in decision-making?

A

Deliberate, slow, analytical

Prone to decision biases, control failures, and self-control issues.

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3
Q

What is the Default Option Bias?

A

Tendency to stick with pre-set options

Example: Automatic enrollment in retirement plans (Madrian & Shea, 1999).

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4
Q

What is a Nudge?

A

Alters behavior without restricting freedom of choice

Examples: SMarT plan, Prize-Linked Savings (PLS) accounts.

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5
Q

What is the Illusion in the context of decision-making?

A

Perception errors (visual or conceptual)

Study: Simons & Chabris (Gorilla Experiment).

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6
Q

What does the Disposition Effect refer to?

A

Selling winners too early, holding losers too long

Studies: Odean (1998); Frydman & Rangel (2014).

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7
Q

What is the Value Function in Prospect Theory?

A

Losses loom larger than gains

Components: Loss aversion, diminishing sensitivity, reference point dependence.

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8
Q

What does the Probability Weighting Function explain?

A

Overweighting small probabilities, underweighting large ones

Application: Explains lottery and insurance behaviors.

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9
Q

What is the House Money Effect?

A

Increased risk-taking after prior gains

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10
Q

What is the St Petersburg Paradox?

A

Classic paradox showing expected utility inconsistencies

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11
Q

What does Myopic Loss Aversion mean?

A

Aversion to short-term losses reduces willingness to take risks

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12
Q

What is the Decoy Effect?

A

Inferior options influence preferences

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13
Q

What is the Framing Effect?

A

Decisions influenced by how choices are presented

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14
Q

What is the Narrow Framing?

A

Focusing on individual decisions rather than integrated outcomes

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15
Q

What is the Diagnostic Actions concept?

A

Seeking information that helps confirm or reject beliefs

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16
Q

What does the Illusion of Control Bias indicate?

A

Overestimating personal control over random events

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17
Q

What is the role of the Reward System (Dopamine) in decision-making?

A

Drives reward-seeking and risk-taking behaviors

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18
Q

What does the Fear System (Serotonin) govern?

A

Loss aversion and risk avoidance

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19
Q

What is Self-Control in the context of decision-making?

A

Process 2 function regulating impulses

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20
Q

What does Hyperbolic Discounting / Present Bias refer to?

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A

Preference for immediate rewards

21
Q

What is the Ellsberg Paradox / Ambiguity Aversion?

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A

Preference for known risks over unknown risks

22
Q

What is the Picking Pennies Bias?

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A

Favoring small, frequent gains despite exposure to rare, large losses

23
Q

What is Information Overload?

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A

Too much information reduces decision quality

Studies: Dijksterhuis et al.; Montier.

24
Q

What is Confirmation Bias?

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A

Seeking information that supports pre-existing beliefs

Study: Wason’s 2-4-6 task.

25
What are Bayesian Learning and Reinforcement Learning?
Bayesian: Infers hidden causes; Reinforcement: Simple correlations ## Footnote Study: Payzan-LeNestour boardgame experiment.
26
What is the Law of Small Numbers / Gambler’s Fallacy?
Expecting small samples to reflect population statistics
27
What does Overconfidence refer to?
Overestimating knowledge/skill ## Footnote Study: Alpert & Raiffa calibration game.
28
What is Inattentional Blindness?
Failure to notice unexpected stimuli when attention is focused ## Footnote Study: Simons & Chabris.
29
What is the Risk After-Effect?
Prior exposure alters perception of risk ## Footnote Study: Payzan-LeNestour et al. (2016).
30
What does Efficient Neural Coding / Normalization Theory explain?
Neural responses represent contrasts relative to recent stimuli ## Footnote Application: Explains Risk After-Effect and adaptive expectations.
31
What are Automatic Enrollment, SMarT, and Prize-Linked Savings (PLS)?
Applications of Nudges to increase savings rates ## Footnote Studies: Madrian & Shea (1999); Benartzi & Thaler (2000); Tufano.
32
What is Neuropharmacology in decision-making?
Adjusting brain chemistry (dopamine, serotonin) to alter risk behaviors ## Footnote Caveats: Effects vary by individual and context.
33
What is Theory of Mind / Strategic IQ?
Ability to model others’ thinking ## Footnote Studies: Bossaerts et al.; Keynes Beauty Contest.
34
What does the Displacement of Authority (Milgram Experiment) show?
People follow authority without questioning
35
What is the Social Persona (Zimbardo Experiment)?
Adopting social roles that override personal morals
36
What is the outcome of the Inattentional Blindness study by Simons & Chabris?
70% failed to notice gorilla ## Footnote Missing critical information in trading.
37
What does the Risk After-Effect study by Payzan-LeNestour et al. demonstrate?
Risk perception adapts to prior exposure ## Footnote Traders underestimate risk after prolonged high risk.
38
What did the Information Overload studies by Dijksterhuis et al. and Montier find?
More information reduces decision quality ## Footnote Poor asset selection, overtrading.
39
What does the Confirmation Bias study by Wason indicate?
People seek confirming evidence ## Footnote Holding onto poor investments.
40
What does the Law of Small Numbers study by Tversky & Kahneman show?
Small samples overweighted ## Footnote Overreaction to short-term trends.
41
What was the finding of the Overconfidence study by Alpert & Raiffa?
Underestimate uncertainty ranges ## Footnote Overtrading, excessive risk-taking.
42
What did the Bayesian vs. RL study by Payzan-LeNestour reveal?
Bayesian learners outperform RL in unstable markets ## Footnote Adaptive trading strategies.
43
What did the Disposition Effect study by Frydman & Rangel find?
Purchase price saliency increases bias ## Footnote Holding losing stocks.
44
What does Theory of Mind predict according to Bossaerts et al. and Keynes Beauty Contest?
Strategic IQ predicts market success ## Footnote Outperforming naive investors.
45
What did the Cultural Dishonesty study by Cohn, Fehr & Marechal conclude?
Reminding bank employees of their role increased dishonesty ## Footnote Culture influences financial misconduct.
46
What interventions can address insufficient savings in Household Finance?
Legislation, Education, Nudges (Auto-enrollment, SMarT, PLS), Organizational changes
47
What interventions can address excessive risk-taking in Investor Behavior?
Education, Nudges, Commitment Devices, Neuropharmacology, Organizational changes
48
What interventions can address corporate malfeasance in Corporate Finance?
Legislation (Sarbanes-Oxley), Education, Organizational reforms, Cultural change

Behavioral Finance (1 decks)

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