Lesson 1: Behavioral Economics; Introduction to Behavioral Finance

Question 1

A subfield of behavioral economics, proposes that psychological influences and biases affect the financial behaviors of investors and financial practitioners. Rather than being rational and calculating, people often make financial decisions based on emotions and cognitive biases.

Answer 1

Behavioral Finance

Question 2

is the study of psychology as it relates to the economic decision-making processes of individuals and institutions. It draws on psychology and economics to explore why people sometimes make irrational decisions, and why and how their behavior does not follow the predictions of economic models.

Answer 2

Behavioral Economics

Question 3

States that when humans are presented with various options under the conditions of scarcity, they would choose the option that maximizes their individual satisfaction.

Answer 3

Rational Choice Theory

Question 4

Has self control and is unmoved by emotions and external factors and, hence, knows what is best for himself.

Answer 4

Rational Person

Question 5

Explains that humans are not rational and are incapable of making good decisions.

Answer 5

Behavioral Economics

Question 6

is the concept in which individuals make decisions based on the knowledge they have. This information is often limited by the individual’s lack of expertise of lack of available information.

Answer 6

Bounded Rationality

Question 7

People can be easily manipulated, and this is often on display in the way promoters craft incentives or deals to make consumers buy certain products. Meant to steer a consumer into making a decision based on choreogragphy demonstration.

Answer 7

Choice Architecture

Question 8

Consider the choice of choosing between two companies to invest in. Systematic patterns of deviation from norm and/or rationality in judgement. (may stir up an unknown bias that yields us to choose the other company)

Answer 8

Cognitve bias

Question 9

People perceive things, event, or other people through their own lenses, potentially discriminating towards others because they simply favor a different alternative.

Answer 9

Discrimination

Question 10

Many consumer decisions are influenced by what other people are doing. Individual decisions are swayed based on what other people do, not necessarily on what is the best income.

Answer 10

Herd Mentality

Question 11

is the principle of how something has been presented to an individual. An outcome may be determined based in the structure of how something has been presented.

Answer 11

Framing

Question 12

Humans tend to make decisions using mental shortcuts as opposed to using long, rational, optimal reasoning. In some situation, it’s easier for the consumer to continue what they’ve been doing as opposed to realize a more beneficial situation exists.

Answer 12

Heuristics

Question 13

Rooted in the notion that people do not like losses.

Answer 13

Loss Aversion

Question 14

For lack of better phrase, the market can take advantage of behavior economics.

Answer 14

Market inefficiencies

Question 15

Consumers and investors may change their spending and trading tendencies based on circumstances.

Answer 15

Mental accounting

Question 16

One field in which behavioral economics can be applied to its behavioral finance, which seeks to explain why investors make rash decisions when trading in the capital markets. Attempt to capitalize on the irrational nature of other players.

Answer 16

Financial Markets

Question 17

When a decision made leads to error, heuristics can lead to cognitive bias. Runs experiments and analyzes people’s decisions to make irrational choices. This concept attempts to override illogical behavior to predict consumption outcomes.

Answer 17

Game Theory

Question 18

Companies are increasingly incorporating behavioral economics to increase sales of their products.

Answer 18

Pricing strategies

Question 19

Same product, but markets them in two different packages to appeal to multiple target groups.

Answer 19

Product packaging and distribution

Question 20

Enumerate the factors that influence behavior

Answer 20

(1) Bounded Rationality
(2) Choice Architecture
(3) Cognitive Bias
(4) Discrimination
(5) Herd Mentality

Question 21

Principals of Behavioral economics

Answer 21

(1) Framing
(2) Heuristics
(3) Loss Aversion
(4) Market Inefficiencies
(5) Mental Accounting
(6) Sunk cost fallacy

Question 22

Applications of Behavioral economics

Answer 22

(1) Financial markets
(2) Game theory
(3) Pricing strategies
(4) Product packaging and distribution

Question 23

Enumerate the common branches of finance

Answer 23

(1) Public Finance
(2) Corporate Finance
(3) Personal Finance
(4) Social Finance
(5) Behavioral Finance

Question 24

Goal of Behavioral Economics

Answer 24

• to understand why humans make decisions they do.
• to explain why people do things and why they choose to not be rational.

Question 25

Downside to Behavioral Economics

Answer 25

• can be used to deceive or manipulate people and their decision making.
• companies can choose to exploit this by packaging their products in a certain way, pricing their goods at specific levels, or customizing their marketing to attract certain markets.