FINAN 6360 - Exam 1 || with Certified Answers.
Forecasting Errors correct answers - We only remember what we see last
- Example: Look at cars, only remember last color of cars
- hear good news about stock and buy those stock disregarding everything else about the stock
Overconfidence correct answers - 75% of Swedish drives are above average
- Think one job and three candidates, one person will get the job and two will not. So you can be
good if someone is a little better they will get the job.
- Men trade more than women, acting on short term information and therefore listen to the noise
and have more worse outcomes
Conservatism correct answers - Slow to update beliefs, prices take time to adjust
- Tendency to cling to a view or a forecast
- Example: Post-earnings-announcement drift, explains the run up part
Representativeness correct answers - The gambler's fallacy
- Believe that smoking isn't that bad because my grandpa smoked until he was 98 so it can't be
that bad, but that's not how it work and smoking kills
- Example: Past returns are indicative of future returns
- Few good days of a good stock performance must believe it is a long term but, but the
correction happens
Framing correct answers - Systematic reversals of preference when the same problem is
presented in different ways.
- Program A and Program B. They are exactly the same but more people chose program A
because of the wording.
- Example: Rename a trial lawyer (unpopular in the US) as a "public protection attorney"
- In reality the chances are the same (50/50) but it is not chosen that way because of the way it is
framed
, Mental Accounting correct answers - Losses I have to absorb, wins I spend (but did not off set
my losses)
- In our head we separate some dollars from different dollars
- Own a house you are going to sell, buy it for 750K, if lower it is loss and if more it is a win, but
you never sold the house
- Example: Car sticker values, you have to negotiate the car value
- "Deals"
Regret Avoidance correct answers - Minimize the worst-case regret
- Avoid nontypical choices small stocks
- Lead to focus on individual stocks and not asset classes
- Home country bias
- Saying no to a good deal in Bermuda because you don't know anything about Bermuda
- Over invest in something you know, almost everywhere in the world has this bias in their home
country
- Fear of regretting after the fact that something turned bad
Loss Aversion (Prospect Theory) correct answers - Tendency to strongly prefer avoiding losses to
acquiring gains
- Would you rather get a $5 discount or avoid a $5 surcharge?
- The endowment effect - the fact that people place a higher value on a good that they own than
on an identical good that they do not own
- A sunk cost is a retrospective (past) cost that has already been incurred and cannot be recovered
- Equity premium puzzle: Stocks can lose, loss is painful, demand a premium
Discrete Retrun correct answers - (end+div-beg)/beg
Continuous Returns correct answers - ln(end+div)-ln(beg)
Forecasting Errors correct answers - We only remember what we see last
- Example: Look at cars, only remember last color of cars
- hear good news about stock and buy those stock disregarding everything else about the stock
Overconfidence correct answers - 75% of Swedish drives are above average
- Think one job and three candidates, one person will get the job and two will not. So you can be
good if someone is a little better they will get the job.
- Men trade more than women, acting on short term information and therefore listen to the noise
and have more worse outcomes
Conservatism correct answers - Slow to update beliefs, prices take time to adjust
- Tendency to cling to a view or a forecast
- Example: Post-earnings-announcement drift, explains the run up part
Representativeness correct answers - The gambler's fallacy
- Believe that smoking isn't that bad because my grandpa smoked until he was 98 so it can't be
that bad, but that's not how it work and smoking kills
- Example: Past returns are indicative of future returns
- Few good days of a good stock performance must believe it is a long term but, but the
correction happens
Framing correct answers - Systematic reversals of preference when the same problem is
presented in different ways.
- Program A and Program B. They are exactly the same but more people chose program A
because of the wording.
- Example: Rename a trial lawyer (unpopular in the US) as a "public protection attorney"
- In reality the chances are the same (50/50) but it is not chosen that way because of the way it is
framed
, Mental Accounting correct answers - Losses I have to absorb, wins I spend (but did not off set
my losses)
- In our head we separate some dollars from different dollars
- Own a house you are going to sell, buy it for 750K, if lower it is loss and if more it is a win, but
you never sold the house
- Example: Car sticker values, you have to negotiate the car value
- "Deals"
Regret Avoidance correct answers - Minimize the worst-case regret
- Avoid nontypical choices small stocks
- Lead to focus on individual stocks and not asset classes
- Home country bias
- Saying no to a good deal in Bermuda because you don't know anything about Bermuda
- Over invest in something you know, almost everywhere in the world has this bias in their home
country
- Fear of regretting after the fact that something turned bad
Loss Aversion (Prospect Theory) correct answers - Tendency to strongly prefer avoiding losses to
acquiring gains
- Would you rather get a $5 discount or avoid a $5 surcharge?
- The endowment effect - the fact that people place a higher value on a good that they own than
on an identical good that they do not own
- A sunk cost is a retrospective (past) cost that has already been incurred and cannot be recovered
- Equity premium puzzle: Stocks can lose, loss is painful, demand a premium
Discrete Retrun correct answers - (end+div-beg)/beg
Continuous Returns correct answers - ln(end+div)-ln(beg)
