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FPS - Chapter 3 Behavioural Finance

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Behavioural Finance
David Skillen
FlashCards por David Skillen, atualizado more than 1 year ago
David Skillen
Criado por David Skillen quase 6 anos atrás
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Resumo de Recurso

Questão Responda
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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