17011209
Description
Flashcards by David Skillen, updated more than 1 year ago
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Created by David Skillen
over 5 years ago
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| Question | Answer |
| Behavioral Finance - Define | Application of psychology to understand human behavior in finance or investing |
| Micro vs Macro | Behavioural Finance Micro (BFMI) -> examines the behavioral biases of individual investors. Compares irrational investors to rational investors envisioned in classic Econ theory known as "Homo Economics" (rational economic human being) Behavioural Finance Macro (BFMA) -> Irregularities in the overall market that contradict the efficient market hypothesis. |
| Rational Economic Individual vs. Behavioural Biased Individual | Rational / Homo Econ Indi -> Perfect Rationality, Perfect Self-Interest, Perfect Information vs. |
| Standard Finance vs. Behavioural Finance | Standard -> rules about how investors should behave rather than by principles describing how they actually behave. Behavioral Finance -> identifies and learns from individual investors |
| Efficient Markets vs. Irrational Markets | Weak Form - All past market prices and data are fully reflected in current securities prices. Technical analysis is of little or no value Semi-Strong Form - All publicly available information is fully reflected in the current stock price. No fundamental analysis and technical analysis are of no value. Strong Form - all information is fully reflected in current stock prices. Including insider trading |
| Market Anomalies - 3 Types | 1) Fundamental -> Stock price compared to companies assessment of intrinisic value. 2) Technical Anomalie -> rely on weak market theory. trends of data can help predict the future stock price. 3) Calendar Anomalie -> January effect. Stocks move higher during certain periods of time in the year. |
| 4 Fundamental Characteristics of a successful client relationship | 1) advisors clearly understand the client's financial goals 2) advisor uses a structured, consistent approach to advising the client 3) the advisor delivers what the client expects 4) both the client and advisor benefit from the relationship |
| A client expects 2 main things from his advisor | 1) an understanding of the client's objectives based on a needs assessment 2) Investment returns that are consistent with those objectives |
| Define Heurustics | Efficient rules of thumb, or beliefs, judgements or preferences |
| Differences between Cognitive and Emotional Biases | Cognitive Bias -> informational or memory errors that are common to all human being. Example: Anchoring - clients get stuck on a certain stock price. Emotional Biases -> come from emotional or intelectual predisposiytion toward a certain judgement . Example - endowment, loss aversion and self control |
| 14 Examples of Cognitive Biases | 1) Overconfidence 2) Representativeness 3) Anchoring and Adjustments 4) Cognitive Dissonance 5) Availability 6) Self-Attribution 7) Illusion of Control 8) Conservatism 9) Ambiguity Aversion 10) Mental Accounting 11) Confirmation 12) Hindsight 13) Recency 14) Framing |
| 6 examples of Emotional Biases | 1) Endowment 2) Self-Control 3) Optimism 4) Loss Aversion 5) Regret Aversion 6) Status Quo |
| Men vs. Woman | Men are 1/3 more risk tolerant than women. |
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