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The Mind of the Investor
Description
Bachelor's degree Trading and Dealing (Benefits of Trading) Mind Map on The Mind of the Investor, created by Vhia Rose on 14/09/2013.
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benefits of trading
trading and dealing
trading and dealing
benefits of trading
bachelor's degree
Mind Map by
Vhia Rose
, updated more than 1 year ago
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Created by
Vhia Rose
about 11 years ago
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Resource summary
The Mind of the Investor
Rational Investor Paradigms
St. Petersburg Paradox
Rational traders assume a value of a gamble is its expected value
Diminishing marginal utility
Solves problem of infinite return for finite value
Increased wealth provides increased utility, at a decreasing rate
Axioms of Choice
Von Neuman and Morgenstern
Ranking Investments
Reflexivity
Completeness (comparability)
Transitivity (preferencing)
Independence
Measurability
Ranking
Prospect Theory
Focuses on change in wealth to determine utility in different situations of uncertainty
Certainty more convincing than expected value
Inconsistency in project evaluation
Framing: Presentation of data provokes emotional response to decision making
Endowment effect: fear of regret, or not willing to sell losing investments sooner
Anchoring: undue emphasis on some factor that affects decision making
Behavioural Finance
Concerned with impact of human emotions and cognitive impairments on investment decision making
Largely rooted in prospect theory
Monty Hall Judgement Error
Door switching
Always switch to maximise probability of win
Benefit to switching = higher value worth
Competition between rational investors should drive up prices to fair value
Dumb, Dumber and Dead
Investment in wrong stock because of similar name
Reliance on overall market strength in expecting underperforming fund will turn around
Overconfidence
Knowledge of facts, concepts and relationships
Need metaknowledge (understanding limits of knowledge)
Benefits
Higher motivation
More persistant
Better performance
Higher success rate
Drawbacks
More aggressive trading
Lower wealth gain than buy-and-hold investors
Neurofinance
Emotion to negative experiences
Irrational overreactions
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