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FIN 4250 > Topic 4 - Emotional Shortcuts and Errors > Flashcards

Topic 4 - Emotional Shortcuts and Errors Flashcards

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1
Q

What are emotional shortcuts based on?

A

Feelings, not logic

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2
Q

What system are emotional shortcuts from

A

System 1

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2
Q

What can we confuse with emotional shortcuts?

A

We can confuse it with cognition shortcuts

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3
Q

Where did emotional shortcuts evolve from?

A

They evolved from our ancestor’s responses to environmental challenges

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4
Q

What are some examples of how emotions evolved from our ancestors?

A

Fear - from threats in the environment
Love - strengthened group cohesion and protection
communication - before language emotions conveyed messages
reinforcement - positive and negative emotions rewarding/directing our behaviours

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5
Q

Can humans learn to set aside emotions when investing?

A

No

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6
Q

True or false: professional investors are able to set aside their emotions, which is why they are called professional

A

false, no one can set aside emotions

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7
Q

How would you describe “emotions”?

A

Short-lived, intense reactions to specific events

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8
Q

How would you describe “moods”?

A

longer-lasting feelings with no specific cause
Less intense than emotions
Can have subtle influence on investors perspective and decisions

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8
Q

How would you describe “affect”?

A

A subtle positive/negative emotional/mood tone
an overall emotional state or mood (that is either positive or negative)

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9
Q

How can emotions affect investing?

A

can lead to impulsive decisions
often resulting in buying high and selling low

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10
Q

How can moods affect investing?

A

prolonged moods can influence risk tolerance
positive mood –> more risk-taking

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11
Q

How can “affect” affect investing?

A

It can shape an investor’s overall approach to investing
positive affect –> optimism –> bullish outlook
negative affect –> pessimism –> bearish outlook

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12
Q

What is a negative emotion in response to danger?

A

Fear

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13
Q

What is a positive emotion in anticipation of reward?

A

Hope

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14
Q

What do fear and hope have in common?

A

they are both out of our control (other people have the control)
Example: the pilot flying the plane

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15
Q

When does fear turn into an emotional shortcut?

A

When fear is absent or when exaggerated?

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16
Q

When does fear guide us correctly?

A

When it prevents us from buying a stock of a company likely to go bankrupt

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17
Q

When does fear guide us wrongly?

A

When it compels us to sell all our stocks in a financial crisis

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18
Q

What does fear do to risk tolerance?

A

Increases risk aversion
(They are less likely to take risks)

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19
Q

What is VIX? (CBOE Volatility Index)

A

is a measure of market volatility (risk) and investor sentiment

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20
Q

If VIX (CBOE volatility index) is high, what does that mean?

A

the market preception is there is a lot of risk in the future

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21
Q

What does fear cause investors to expect?

A

low returns with high risk

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22
Q

What does hope cause investors to expect?

A

high returns with low risk

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23
What did Gallup's study show? (Overvalued vs time to invest)
That when large proportions of investors believed the stock market was overvalued, they also believed that "now would be a good time to invest"... these two things contradict each other
24
What happens when happy people give to charity?
It increases their happiness
25
What do people who donate to charity want to talk about and what do they not want to talk about
They want to talk about: the utilitarian benefits for those receiving the money, the emotional benefits they gain They do not want to talk about the tax benefits
26
What did Oswald study find? (regarding happiness and productivity)
If someone is happier they are more productive people who watched a 10-minute comedy sketch were more productive than those watching a neutral clip They also found that those who were unhappy (death, family illness) were less productive
27
What did Ifcher and Zarghamee find in their study? (in regard to happiness and savings)
Happiness promoted delayed gratification and increased savings
28
What did Lerner's study find? (in regard to sadness and patience) (2013)
Sadness results increases impatience and intensifies short term focus Those who were sadder were less patient Sadd people would accept less money today to avoid waiting three months for more (13-14% more)
29
What did Liu's study find? (in regard to sadness and investors performance)
Sadness among mutual fund managers following the death of a parent results in worse performance --> leading to taking less risk --> leading to losses
30
What did Lerner study find? (in regard to sadness and systems)
Sadness promotes reliance on reflective system 2, instead of the intuitive system 1. And counters a rang of cognitive and emotional errors
31
What did Faraji-Rad and Lee's study find? (in regard to sadness and banking happiness)
People will bank happiness when anticipating a future sad event Accumulated happiness is a resource to draw from in times of sadness
32
What did Schulze's study find? (in regard to cognitive load and evaluating)
Participants under cogitive load showed strong disgust for eating dog food, and undervalued the sandwich (due to system 1) Participants without cognitive load balanced their disgust with its nutritional value (using system 2). Making them more open to purchasing it or requiring less money to eat it
33
What are the consequences of chronic anger?
negative outcomes in personal relationships and health
34
What is chronic anger?
a persistent emotional state characterized by frequent episodes of anger
35
Is occasional anger okay?
occasional anger can serve as a tool for better decision-making It can also counter cognitive errors
36
What can anger do in regard to negotiation?
It can enure fair treatment and improve ones bargaining position
37
What is an example of the use of anger on purpose?
Debt collectors faking anger to elicit a sense of urgency in debtors
38
What is moral anger?
It arises when witnessing unfair actions, even if one isn't directly affected
39
What is a cognitive emotion?
Emotions that arise from the interaction between our thinking (cognition) and our feelings (emotion)
40
What is the disposition effect? (important)
An emotional bias where the pleasure of realizing gains (pride) and the pain of realizing losses (regret) influence selling behaviours When individuals feel they are directly responsible for their investment choices, the emotional weight of potential regret or pride is amplified
41
What does the disposition effect look like for rational investors?
Rational investors are quick to realize losses (reduce taxes) and slow to realize gains (add taxes)
42
What does the disposition effect look like for normal investors?
Normal investors are quick to realize gain (for the emotional benefit of pride) slow to realize losses (for the emotional costs of regret)
43
How can positive or negative past experiences influence future decisions? (in professional investing)
Positive & negative past experiences with stock can influence future decisions Fund managers tend to repurchase stocks based on past outcomes
44
When a fund manager transitions to a new role, what happens? (with their emotional bias)
Their emotional bias persists even after the transition to a new role. this indicates deeply ingrained behavioural patterns
45
What is the currency hedging method of minimizing regret?
Currency hedging shows the desire to avoid full regret, so portfolio managers feel that they have made at least one right decision.
46
What is dollar cost averging (strategies to minimize regret)
This strategy is where investors spread out their market entry or exit of a stock, this reduced the potential sting of regret if prices drop or rise shortly after liquidation don't buy $1000 of a stock one day, buy $100 of a stock for 10 days
47
What does self-control center on?
It centers on the interaction between the hot emotion of system 1 and the cool cognition of system 2
48
When can self control be insufficient?
when hot emotion urging immediate gratification overcomes cool cognition urging delayed gratification
49
When can self-control be excessive?
When hot emotion urging delayed gratification overcomes cool cognition urging immediate satisfaction
50
When is self-control insufficient? (what happens)?
Emotions can compel us to spend too much now and save little for later, cognition does not counter that emotion sufficiently
51
When is self-control excessive? (what happens)
Emotion compels us to spend too little now (common when we are old) cognition does not counter that emotion sufficiently
52
What can help individuals with their self-control?
Setting predetermined guidelines to help individuals govern their own actions can help Especially in situations that test their discipline
53
What is a "daily settlement rule"
some trading systems require traders to settle their positions at the end of each day this means realizing gains / losses on a daily basis
54
What is the prisoner's dilemma?
A example where two prisoner must decide to trust each other or act in self interest Ths outcome varies based on mutual trust or lack of trust If both prisoners testifies against one another they both get 3 years, If one prisoner testifies and the other stays silent one goes free and one goes to jail for 5 years. If both of them are silent then they both serve just one year
55
What is the relationship between trust and risk tolerance?
Those with higher levels of trust tend to have a higher risk tolerance, and therefore a lower natural tendency to regret
56
What can happen with misplaced trust?
Misplaced trust can lead to financial disasters (ponzi schemes)
57
Which states are more susceptible to ponzi schemes?
those with higher trust
58
What facilitates ponzi schemes?
trusting environments
59
How would you describe "mood"?
is a less intense but longer-lasting emotion that can influence financial behaviour and decisions
60
What can sunshine influence in regard to financial decisions?
Sun shine can influence positive moods and can lead to increased spending
61
On cloudy days, what happens to financial officers?
Financial officers become more stringent with credit approvals when it is cloudy
62
What is optimism and pessimism considered as?
They are considered as moods
63
Is optimism less intense or more intense than hope or happiness?
Optimism is not as intense as hope and happiness
64
Is pessimism less intense or more intense than fear or sadness?
Pessimism is not as intense as fear or sadness
65
What is tied with high levels of trust?
Higher risk tolerance higher regard for ethics Fewer agency problems

FIN 4250 (8 decks)

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