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Exam 26: Behavioural Finance: Implications for Financial Management

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Question 1

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Provide a definition of myopic loss aversion.

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The tendency to focu...

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Question 2

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If a market is truly efficient, then all investments in that market are zero net present value opportunities.

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Over the past six months, you have watched as your parent's retirement savings have declined in value by 45 percent due to a severe financial market downturn. As a result, you have decided that you will never invest in stocks for your own retirement but will instead keep all of your money in an insured bank account. Which behavior characteristic have you developed as a result of the market downturn?

What is the best definition of money illusion

When weighing a decision, Kate places greater emphasis on opinions that match her own than she does on opinions offered by others that disagree with her personal point of view. Kate illustrates which one of the following?

Provide a definition of money illusion.

Provide a definition of a sentiment-based risk.

Recently, a neighbor you have known for years won a lottery and received a $250,000 prize. This neighbor decided to invest all of his winnings in a new business venture that he knew only had a five percent chance of success. Previous to this, the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week. Which one of the following behaviors most applies to your neighbor's decision to invest in this business venture now?

Roger's Meat Market is a chain of retail stores that limits its sales to fresh-cut meats. The stores have been very profitable in northern cities. However, when two stores were opened in the south, both lost money and had to be closed. Roger, the owner, has now concluded that no southern-based store should be opened as it would not be profitable. Which one of the following applies to Roger?

Provide an explanation of availability bias:

A sudden and severe decline in market prices is best described as a market:

You started an online business three weeks ago. Thus far, you have averaged 10 sales a day, which is one sale for every five hits. You are now considering giving up your day job and becoming a full-time online retailer. You have calculated the amount of income you can earn based on 10 sales a day and know that level of income would support you in a comfortable fashion. The belief that you will have 10 sales per day on average if this becomes your full-time occupation is based on which one of the following?

Frame dependence is best defined as:

Old Country Productions requires skilled furniture finishers to put the final touches on all of the furniture it produces. The firm hired two individuals last year who had been students in Mr. Tedwell's wood shop class in high school. Both of these employees have demonstrated exceptional skills and have already been promoted to senior finishing positions. The firm currently has an opening for one additional finisher. Tom, the head of the finishing section, has stipulated that he only wants to interview candidates who have completed Mr. Tedwell's course. Tom's behavior is typical of someone who has which one of the following characteristic behaviours?

Bill feels that he possesses a good dose of "street smarts". Thus, he makes his business decisions based on how a project feels to him rather than taking the time to financially analyze a project. This type of behavior is referred to as:

You are a hard-charging manager who doesn't really like to sit at a desk for too long. You prefer to gather information quickly, make a decision, and move on to the next item on your agenda. Which one of the following applies to you?

Provide an example of a managerial decision that illustrates each one of the following behaviors: Behavior: Overconfidence - Example: Behavior: Affect heuristic - Example: Behavior: Loss aversion - Example:

Assume you are an overconfident manager. You are most apt to do which one of the following more so than you would if you were not overconfident?

Provide a definition of endowment effect.

Which one of the following best illustrates an error which you, as a manager, might make due to overconfidence?