Behavioral Finance and Probability Assessment Quiz

Investors may believe that growth will continue when they observe previously rising shares, leading them to invest more in those stocks.

They found that managers are more likely to make buy or sell decisions based on recent returns of assets rather than the financial results of the companies.

Banz found that the difference in average annual returns between the smallest and largest stock portfolios was 20 percent.

<p>Fama and French observed a smaller difference of 9 percent in returns between the smallest and biggest companies, indicating reduced small-size effect.</p> Signup and view all the answers

<p>Traditional finance theory attributes it to additional risks and microstructural factors like liquidity, while financial behaviorists offer alternative interpretations related to investor psychology.</p> Signup and view all the answers

<p>Bayes's rule helps rational investors adjust their opinions based on new evidence, improving the accuracy of their probability assessments.</p> Signup and view all the answers

<p>The initial probability is 15%, as only 15% of the cabs in the city are blue.</p> Signup and view all the answers

<p>The witness can identify the color correctly 80% of the time.</p> Signup and view all the answers

<p>The median of the respondents' answers indicated a probability as high as 80% for the cab being blue.</p> Signup and view all the answers

<p>People often overestimate probabilities that conform to stereotypes while underestimating the base rate of the larger group.</p> Signup and view all the answers

<p>Responders believed it was more probable that Linda is a bank teller and active in the feminist movement than just being a bank teller.</p> Signup and view all the answers

<p>It suggests that despite the witness's identification, statistically, it is more likely for a cab to be green because they constitute 85% of the total.</p> Signup and view all the answers

<p>Responders often disregard statistical base rates, leading to overconfidence in their judgments about individual cases based on stereotypes.</p> Signup and view all the answers

<p>Investors tend to prefer familiar companies, which can lead to nonoptimal diversification and inefficient portfolios.</p> Signup and view all the answers

<p>It may result in nonoptimal diversification and an inefficient portfolio.</p> Signup and view all the answers

<p>It helps maintain informational efficiency and accurate market pricing.</p> Signup and view all the answers

<p>The way information is presented can significantly influence their reactions.</p> Signup and view all the answers

<p>A company changing its name to one associated with the Internet could cause a sharp increase in its stock price.</p> Signup and view all the answers

<p>Analysts often display overly optimistic tendencies in their forecasts and recommendations.</p> Signup and view all the answers

<p>It constrains their awareness and acceptance of sophisticated or less familiar securities.</p> Signup and view all the answers

<p>Recognition alone does not guarantee an information advantage over average market players.</p> Signup and view all the answers

<p>Investors often wrongly interpret consecutive rises and falls as definitive trends.</p> Signup and view all the answers

<p>If a large group of investors believes a trend is starting, their actions can trigger further rises or falls, confirming their expectations.</p> Signup and view all the answers

<p>This is attributed to excessive optimism and wishful thinking during bullish conditions.</p> Signup and view all the answers

<p>To satisfy investors' curiosity and allow them to compare current prices to historical peaks.</p> Signup and view all the answers

<p>They choose the lottery offering a higher payoff, ignoring the risk involved.</p> Signup and view all the answers

<p>Investors use these levels as reference points due to the anchoring effect and their excessive optimism.</p> Signup and view all the answers

<p>It is often seen as an indication that the positive trend will continue, justifying further price increases.</p> Signup and view all the answers

<p>They tend to select the lottery with the higher chances of winning.</p> Signup and view all the answers

<p>Many investors view it as an attractive buying opportunity.</p> Signup and view all the answers

<p>Preferences should not change if both options are altered in the same way.</p> Signup and view all the answers

<p>It is the tendency to overestimate the value of a lottery with a certain reward versus one with a higher expected reward but some risk.</p> Signup and view all the answers

<p>Classical finance does not account for behavioral indicators like the anchoring effect or excessive optimism.</p> Signup and view all the answers

<p>Because strategy A offers a certain income, despite a slightly lower expected reward.</p> Signup and view all the answers

<p>They may switch to strategy B, which offers the higher expected value.</p> Signup and view all the answers

<p>The way a decision problem is presented, or information framing.</p> Signup and view all the answers

<p>Kahneman and Tversky conducted significant research in this area.</p> Signup and view all the answers

<p>Investors' preferences change, contradicting the axiom of continuity.</p> Signup and view all the answers

<p>Decision makers alter their preferences based on how risk is applied to both options.</p> Signup and view all the answers

<p>The forecasts were systematically underestimated.</p> Signup and view all the answers

<p>Narcissism is related to but distinct from overconfidence, as it involves a need to maintain a positive self-image through high-stakes activities.</p> Signup and view all the answers

<p>Extrapolation bias is the tendency to overemphasize past trends for future predictions, leading to overly optimistic forecasts if growth rates are assumed too high.</p> Signup and view all the answers

<p>Investors believe that stock returns develop in predictable patterns that can be identified through historical price observations.</p> Signup and view all the answers

<p>They investigated the impact of narcissism among executives in real-life scenarios, specifically in mergers and acquisitions.</p> Signup and view all the answers

<p>Overconfidence can lead narcissistic individuals to take excessive risks, such as making large bets on uncertain outcomes.</p> Signup and view all the answers

<p>Assuming consistent growth rates can lead to overestimated financial forecasts and inflated stock pricing.</p> Signup and view all the answers

<p>Investors closely observe short-term trends to identify potential patterns, which might not actually exist in random data.</p> Signup and view all the answers