[FHCE 3200] - Midterm Exam Guide - Everything you need to know! (14 pages long)

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FHCE 3200
MIDTERM EXAM
STUDY GUIDE
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Examples
- Peanut Butter
You must buy peanut butter for your house. You go to the store and head to the correct
aisle.
How do you choose the right one?
- Credit Card
You ust select your first credit card. You search olie…
How do you choose the right one?
Heuristics can create bias
- Status quo bias
Preference for how things are
Resistance to changing things
Fear of making the wrong decision
- Loss aversion
People in general are fearful of loss
Investors with 20 year investment time horizon often tend to focus on short term losses
instead of focusing on long term gains
- Optimism bias
Most people believe that they will never experience painful losses
Most people believe that they are a little better than average in their tasks
Leads to overconfidence & risky decisions
- Confirmatory bias
Seeking to confirm that their decision is correct
People often check reviews about a product after they have purchased it instead of checking
reviews before the purchase
What to watch out for…
- Many businesses also use behavioral economic principles to increase their profits from
customers
Insurance companies keep raising their premiums
o What kind of bias prevents consumers from shopping around?
Cell phone service providers add extra charges to monthly bills
o What kind of bias prevents consumers from complaining?
Credit card teaser rates
o What kind of biases play a role here?
Consumer staples companies often reduce the quantity within their packages while keeping
the price same
o What kind of biases?
Increasing Savings Across Time
- How much should we be saving every month?
- Save before you spend
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- Pre-commit to saving future raises (SaveMoreTomorrow® program)
Risk Capacity and Tolerance
- Capacity = how much risk should you take?
- Tolerance = how much will you take?
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