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    Biases and Realistic Preferences PDF

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    Akanksha
    This document discusses various cognitive biases and heuristics that can influence investors' decisions. It presents 10 multiple choice questions that assess understanding of concepts like conservatism, framing, availability bias, representativeness, loss aversion, and prospect theory. Question 3 illustrates the anchoring bias, where subjects' estimates are influenced by the initial asking price presented. Prospect theory assumes utility functions are S-shaped over gains and losses, rather than solely defined by wealth as in traditional theory.

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    Biases and Realistic Preferences PDF

    Uploaded by

    Akanksha
    51 views3 pages
    This document discusses various cognitive biases and heuristics that can influence investors' decisions. It presents 10 multiple choice questions that assess understanding of concepts like conservatism, framing, availability bias, representativeness, loss aversion, and prospect theory. Question 3 illustrates the anchoring bias, where subjects' estimates are influenced by the initial asking price presented. Prospect theory assumes utility functions are S-shaped over gains and losses, rather than solely defined by wealth as in traditional theory.

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    Behavioural Finance

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    Biases_and_realistic_preferences.pdf

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    This document discusses various cognitive biases and heuristics that can influence investors' decisions. It presents 10 multiple choice questions that assess understanding of concepts like conservatism, framing, availability bias, representativeness, loss aversion, and prospect theory. Question 3 illustrates the anchoring bias, where subjects' estimates are influenced by the initial asking price presented. Prospect theory assumes utility functions are S-shaped over gains and losses, rather than solely defined by wealth as in traditional theory.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    51 views3 pages

    Biases and Realistic Preferences PDF

    Uploaded by

    Akanksha
    This document discusses various cognitive biases and heuristics that can influence investors' decisions. It presents 10 multiple choice questions that assess understanding of concepts like conservatism, framing, availability bias, representativeness, loss aversion, and prospect theory. Question 3 illustrates the anchoring bias, where subjects' estimates are influenced by the initial asking price presented. Prospect theory assumes utility functions are S-shaped over gains and losses, rather than solely defined by wealth as in traditional theory.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Biases and realistic preferences

    1) Which of the following describes investors’ behavior in being too slow in updating their beliefs
    in response to new information?
    a) Overconfidence
    b) Conservatism
    c) Framing
    d) Regret avoidance

    2) Which of the following is the technical name for people’s desire to find information that
    agrees with their existing view?
    a) Conservatism
    b) Framing
    c) Confirmation bias
    d) Over-optimism

    3) Participants in an experiment were taken to a house for sale, asked to inspect the house for 20
    minutes, given a 10-page handout giving information about the house and about other houses
    in the area. The handout given to subjects were identical expect for the asking price. Subjects
    were then asked their opinions of the appraisal value, appropriate listing, purchase price and
    the lowest offer price they would personally accept. Agents who were given an asking price of
    $119,900 had a mean predicted appraisal value of $114,201, listing price of $117,745, a
    purchase price of $111,454, and a lowest acceptable price of $111,136. Subjects who were
    given an initial asking price of $149,900 had a mean appraisal value of $128,754, listing price
    of $130,981, predicted purchase price of $127,318 and a lowest offer price of $123,818. What
    bias does this experiment illustrate?
    a) Overconfidence
    b) Conservatism
    c) Framing
    d) Anchoring

    4) Kahneman and Tversy (1973) asked people the following: “In a typical example of text in the
    English language, is it more likely that a word starts with the letter K or that K is its third
    letter?” Of the 152 people in the sample, 105 generally thought that words with the letter in
    the first position were more probable. However, in reality there are approximately twice as
    many words with K as the third letter as there are words that begin with K. People index on
    the first letter, and can recall them easier. Which bias does this example illustrate?
    a) Overconfidence
    b) Conservatism
    c) Confirmation bias

    This study source was downloaded by 100000795554905 from CourseHero.com on 11-23-2022 21:40:31 GMT -06:00

    https://www.coursehero.com/file/96329328/Biases-and-realistic-preferencespdf/
    d) Availability bias
    5) If an investor sees many periods of good earnings then she is inclined to believe that the firm
    is one with particularly high earnings growth, and hence is likely to continue to deliver future
    high earnings growth. This is an illustration of which bias?
    a) Overconfidence
    b) Representativeness
    c) Availability bias
    d) Loss aversion

    6) A person may reject an investment when it is posed in terms of risk surrounding potential
    gains, but may accept the same investment if it is posed in terms of risk surrounding potential
    losses. What is this an example of?
    a) Framing
    b) Regret avoidance
    c) Overconfidence
    d) Conservatism

    7) What type of utility function does the behavior in question 6 describe?


    a) Mean-variance utility
    b) Prospect utility
    c) Keeping up with the Joneses
    d) Habit utility

    8) What types of errors lead investors to misestimate the true probabilities of possible events or
    associated rates of return?
    a) Regret avoidance
    b) Framing errors
    c) Information processing errors

    9) Conservatism explains why investors are too _________ in updating their beliefs in response
    to news, and hence, they initially ________________ to news.
    a) quick; overreact
    b) quick; underreact
    c) slow; underreact
    d) slow; overreact

    10) Which of these following statements is not correct?


    a) Traditional theory assumes that utility functions are concave and defined in terms of
    wealth.
    b) Prospect theory assumes that utility functions are S-shaped.

    This study source was downloaded by 100000795554905 from CourseHero.com on 11-23-2022 21:40:31 GMT -06:00

    https://www.coursehero.com/file/96329328/Biases-and-realistic-preferencespdf/
    c) Prospect theory assumes that utility functions are convex over gains and concave over
    losses.
    d) Prospect theory assumes utility functions are defined over gains and losses.

    This study source was downloaded by 100000795554905 from CourseHero.com on 11-23-2022 21:40:31 GMT -06:00

    https://www.coursehero.com/file/96329328/Biases-and-realistic-preferencespdf/
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