Psych Flashcards
(9 cards)
Lana purchased stock in an artificial intelligence software company last year shortly after the company’s IPO. Over the past year, the stock price has decreased by 50%. Lana believes the price she paid for the stock represents the actual value of the company currently and that the price will rise to where it should be based on her original research.
Lana is exhibiting which of the following?
Confirmation bias
Anchoring bias
Familiarity bias
Overcomfidene
Anchoring bias exists when an investor “anchors” on the purchase price as representing the value of a stock and resists selling the stock even if the price decreases
Gio has always been a conservative investor with a multimillion-dollar portfolio equally split between S&P 500 index funds and government securities. Last year, his portfolio grew by $500,000, exceeding his yearly goal. Gio has decided to invest the additional $500,000 in Bitcoin futures.
What bias is Gio exhibiting?
Snakebite effect
Break-evenitis
Recency bias
House money effect
When investors take on significantly more risk following gains, they exhibit house money effect.
Hai has always dreamed of owning a cabin cruiser boat to enjoy the ocean and spend weekend nights on the boat in the harbor. Recently, she found the perfect boat and is preparing to buy it.
The boat’s price is $150,000, and Hai is considering liquidating one of two stock positions currently valued at $200,000 to make the purchase. Stock A has increased in value by $50,000 over the past nine months, and Stock B has decreased by $20,000 over the past five years. Hai decides to sell Stock A while it is up and continue to hold Stock B in hopes the stock price will rebound.
What bias is Hai exhibiting?
Contrast Effect
Break-even Effect
Disposition Effect
Dunning-Kruger Effect
The disposition effect causes people to hold losing investments for too long and sell winning investments too quickly.
An investor has been reflecting on the stock market performance over the last twelve months and begins to add back the money they had lost. Based on this reflection, the investor concedes that this will likely be the performance expected moving forward.
Which of the following best describes this bias?
Under-confidence
Disposition Effect
Recency Bias
Prospect Theory
This investor is clearly exhibiting recency bias. This is exhibited by their assumption that what just occurred is likely to be a reality for the foreseeable future.
An investor has been reflecting on the stock market performance over the last twelve months and begins to add back the money they had lost. Based on this reflection, the investor concedes that this will likely be the performance expected moving forward.
Which of the following best describes this bias?
Under-confidence
Disposition Effect
Recency Bias
Prospect Theory
This investor is clearly exhibiting recency bias. This is exhibited by their assumption that what just occurred is likely to be a reality for the foreseeable future.
Chip recently won a share of a Powerball lottery drawing and is about to receive a lump-sum payment of $10 million. He has never used a financial advisor but feels he should now and is deciding between two advisors recommended by friends. One young advisor, Gordon, wears custom-made suits, drives a BMW XM, and collects Patek Phillipe watches. Another recommended advisor, Wynn, has practiced much longer, wears khaki slacks and polo shirts, and drives a Chrysler Pacifica Hybrid minivan. Wynn has a better money management track record, but Chip chooses Gordon as his financial advisor.
Which bias does Chip exhibit when selecting Gordon?
Halo Effect
Hindsight Bias
House Money Effect
Heuristic
The halo effect refers to the tendency to use your first or overall impression of a person to evaluate specific traits that you haven’t actually observed
Chip has just completed his first year as an associate advisor with a large national brokerage firm. He is recommending a new client make a significant investment in three companies in a developing niche manufacturing sector he believes will experience “unbelievable growth” in the future. Chip read about the manufacturing process concept in college and regularly scours the r/investing Reddit channel for fresh ideas to maximize client’s portfolio gains. He finished second to last in his college’s mock investment club challenge.
What cognitive bias is Chip MOST likely exhibiting through his investment recommendations?
Ellsberg’s paradox
Denial
Dunning-Kruger Effect
Overconfidence
The Dunning-Kruger effect occurs when a person’s lack of knowledge and skills in a certain area causes them to overestimate their competence
Ruth’s grandparents lost their farm during the Great Depression, and her parents later kept money in cash and never borrowed money. Ruth, age 40, is successful in her career and is consulting with a financial advisor for the first time to consider implementing a formal financial plan. Ruth has always leased a nice apartment in a major city and invests exclusively in U.S. Treasuries. She is concerned about her growing income tax burden and fears she will not accumulate enough money to be financially secure and retire in 20 or 25 years.
Which behavioral finance paradigm is likely influencing Ruth’s approach to planning?
Money script
Money story
Money lesson
Financial narrative
Money scripts Money scripts are learned behaviors and preferences that move you through the world, and they greatly impact your financial decisions. A person’s views, attitudes, and belief system about money shape the way they approach, discuss, and further their financial
An employee recently started with a new company and decides to roll $100,000 from their last company’s 401(k) into the retirement plan offered at the new company. There are ten investment options in the plan, and they allocated their money based on the consensus opinion of how their new colleagues had invested their funds.
Which bias is the employee exhibiting?
Herd mentality
Familiarity You
Confirmation bias
Naïve diversification
Since the new employee relied primarily on her colleague’s consensus opinion, they are demonstrating herd mentality
