MIS 4500 Lecture Notes - Lecture 7: Mutual Fund, Fallacy, Prospect Theory

• School: University of Manitoba
• Department: Management Info. Systems
• Course: MIS 4500
• Professor: Pourang Irani

Document Summary

Availability heuristic: back-of-the envelope calculation based on readily available info. Overconfidence: setting too narrow of confidence bands; get surprised frequently. Anchoring-and-adjustment: to be influenced by and toward the past observation or a number you"re working from: underreact: when you don"t know how to incorporate the new information, you stay with your past belief. Aversion to ambiguity: fear of the unknown; proclivity to choose 100% probably. Such heuristics influence: analysts" earnings forecasts, investors" evaluation of mutual fund performance, corporate takeover decisions and the type of portfolios selected by both individual and institutional investors. Other heuristics: excessive optimism, illusion of validity, hindsight bias, illusion of control and self-attribution error. Frame: form used to describe a decision problem; traditionally (incorrectly) assumed to be transparent. Frame dependence: equivalent frames may be opaque causing people to feel differently when faced with different but equivalent frames; the way people behave depends on the way that their decision problems are framed.