FIN 501 Lecture Notes - Lecture 9: Houli District, Fallacy
20 Nov 2014
School
Department
Course
Professor
Document Summary
Behavioral finance research to understand + explain how reasoning errors influence investor decisions + market prices. Cognitive psychology how people think, reason, + make decisions. Alternative theory to classical, rational economic decision making. Emphasizes that investors tend to behave differently when facing prospective gain/loss. They are more distressed by prospective losses than are happy w/ prospective gain. People focus on changes in wealth vs. levels of wealth. Judgment errors o o o o o o o o o o o o o. Frame dependence investors make inconsistent choices when presented 2 different (buy equivalent) problems. Anchoring associating stock w/ purchase price, fixating on a reference price. Loss aversion reluctance to sell after price , aka breakeven effect. House money effect engaging in mental accounting segment their $ into bucks. Illusion of knowledge belief that you can make more informed judgments. Snakebite effect unwilling to take risk following a loss.
