Deck 11: Behavioral Finance

Question 1

Which of the following fields of finance is a study of logical relationships among assets?

A) theoretical finance
B) empirical finance
C) behavioral finance
D) practical finance

Answer 1

theoretical finance

Question 2

The study of investor decision making which includes psychological and economic factors is called:

A) theoretical finance.
B) empirical finance.
C) behavioral finance.
D) illogical finance.

Answer 2

behavioral finance.

Question 3

Which of the following statements about behavioral finance is not correct?

A) Behavioral finance is a study of how investors make decisions to buy and sell securities.
B) Behavioral finance research generally indicates that investors act very rational most of the time.
C) Behavioral finance is a study of how investors choose between alternatives.
D) Behavioral finance research attempts to explain the irrational decisions made by investors.

Answer 3

Behavioral finance research generally indicates that investors act very rational most of the time.

Question 4

All but one of the following accurately describes the findings of behavioral finance research?

A) prejudices
B) emotional
C) intuition
D) rational

Question 5

Which of the following may explain why investors buy the stock of Fortune's Most Admired Companies?

A) biased expectations
B) representativeness heuristic
C) myopic loss aversion
D) gambler's fantasy

Question 6

Investors' attempts to avoid the psychological impact of investment losses are called:

A) loss aversion.
B) loss prevention.
C) gambler's fallacy.
D) herding.

Question 7

When an investor is more likely to sell appreciated stock and hold on to stocks valued under purchase price, this behavior is called:

A) gambler's fallacy.
B) loss aversion.
C) loss prevention.
D) fear of regret.

Question 8

An investor, with a fear of regret, may

A) actively trade his/her portfolio.
B) buy and hold, seldom trading securities out/into the portfolio.
C) form an above average risk stock portfolio.
D) sell losing stocks very quickly.

Question 9

The tendency to focus on daily price fluctuations of their portfolio rather than the long-term is called:

A) fear of regret.
B) myopic loss aversion.
C) asset segregation.
D) framing.

Question 10

The concentration of stock portfolios in telecommunications and Internet stocks was an example of:

A) herding.
B) gambler's fallacy.
C) contrarian behavior.
D) illusion of truth.

Question 11

When the original purchase price of the stock influences subsequent decisions to sell/hold, this is called:

A) hindsight bias.
B) anchoring.
C) asset segregation.
D) prospect theory.

Question 12

When an investor trades stocks in their portfolio every day they may be said to be experiencing:

A) fear of regret.
B) gambler's fallacy.
C) illusion of control.
D) illusion of truth.

Question 13

Which of the following is an example of prospect theory?

A) An investor is reluctant to invest in stocks in fear of making a bad investment.
B) An investor investment behavior changes when the nest egg moves from a net gain to losses.
C) An investor trades actively exhibiting their control over their investments.
D) An investor focuses on the daily, short-term performance of the portfolio, not the long-term.

Question 14

Which of the following is associated with mental accounting, a form of prospect theory?

A) Investors feel overconfident and trade stocks too frequently.
B) Investors differentiate between dividend dollars and price appreciation (capital gains).
C) An investor realizes that writing covered call options is a trade for future stock price appreciation.
D) A stock does not incur a loss until it is sold.

Question 15

Fifteen of sixteen stocks owned by an investor advanced last quarter. The investor is upset about the loss incurred in the one stock. This is an example of

A) gambler's fallacy.
B) asset segregation.
C) regression to the mean.
D) framing.

Question 16

Asset segregation explains investors' reluctance to:

A) diversify their portfolios.
B) sell above the purchase price.
C) sell a specific stock at a price below the purchase price.
D) pay commissions on trades.

Question 17

Pet investing strategies that have worked in the past are tried over and over again. This is an example of:

A) hindsight bias.
B) gambler's fallacy.
C) asset segregation.
D) herding.

Question 18

Most portfolio managers construct stock portfolios with fewer and different stocks than "market portfolios."This feeling that they can "beat the market"is called:

A) gambler's fallacy.
B) myopic loss aversion.
C) overconfidence.
D) anchoring.

Question 19

The _____ is the contention that things that are easier to remember are thought to occur more often.

A) illusion of truth
B) biased expectations
C) availability heuristic
D) illusion of control

Question 20

Stock splits, that give investors more shares, appear to investors as a wealth enhancing exercise. This feeling is:

A) an illusion of truth.
B) an illusion of control.
C) one of reference dependence.
D) an example of biased expectations.

Question 21

A feeling that low price stocks are risky is an example of:

A) anchoring
B) biased expectations.
C) fear of regret.
D) herding.

Question 22

More stop orders at $25 versus $25.10 is an example of

A) investors thinking that $25 will occur more frequently than $25.10.
B) reference dependence.
C) biased expectations.
D) extrapolation.

Question 23

A belief that in a sequence of independent events recent occurrences influence the next outcome is called:

A) extrapolation.
B) sample size bias.
C) illusion of truth.
D) gambler's fallacy.

Question 24

Acting on a belief that recent gains in stock prices will continue is a behavioral finance example of:

A) extrapolation.
B) regression to the mean.
C) disposition effect.
D) hindsight bias.

Question 25

When an unusual occurrence occurs, such as a stock price jump of 10% in one day, it is not likely to be repeated the next trading day. This is an example of

A) anchoring.
B) asset segregation.
C) framing.
D) regression to the mean.

Question 26

The proposition that people tend to believe more readily in things that are easy to understand than complicated things is called

A) anchoring
B) biased expectations
C) illusion of truth
D) prospect theory

Question 27

The tendency to make decisions on what we want to occur rather than what rational statistical thinking would suggest is

A) Self-affirmation bias
B) Outcome bias
C) Confirmation bias
D) Hindsight bias

Question 28

Empirical finance seeks to test theories with economic and financial data.

Question 29

Behavioral finance combines economics with psychology to explain investor decision making.

Question 30

"A well-run company is a good investment"is an example of representative heuristic.

Question 31

One must know the stock price to assess a company stock investment.

Question 32

With aversion to losses, investors tend to let their gains ride and cut or sell their losing stocks.

Question 33

Investor tendency to sell a winning stock and hold a losing stock is called the disposition effect.

Question 34

Investors often delay or postpone stock trading decisions for fear of making mistakes.

Question 35

An investor who trades stocks in his/her portfolio several times per week with every market swing is practicing hindsight bias.

Question 36

Herding is where a group of investors gather together and decide their stock selection/decisions for the month.

Question 37

Portfolios managed by committees tend to outperform portfolios managed by an experienced portfolio manager.

Question 38

Investors tend to make buy/sell decisions on the basis of original purchase price of the stock. This is called anchoring.

Question 39

Frequent trading of stocks in a portfolio is an example of "illusion of control."

Question 40

Prospect theory may explain why investors with stock losses will step outside their risk profile in orderto recoup the losses.

Question 41

Mental accounting is closely associated with prospect theory.

Question 42

Investor tendency to look at investment decisions individually rather than as part of a whole portfolio is called framing.

Question 43

The use of stock selection techniques that "worked successfully"in the past is hindsight bias.

Question 44

Focusing on price/earnings ratios and EPS to select stocks for a portfolio is an example of availability heuristic.

Question 45

Investors tend to believe things more readily if easy to understand.

Question 46

"Never buy stocks valued under $10"is an example of biased expectations.

Question 47

Extrapolating recent stock price movements as a forecast for future stock values tends to support the concept of regression to the mean.

Question 48

Having selected five out of five stock winners in the last quarter, the portfolio manager uses the same selection technique this quarter. This is an example of the gambler's fallacy.

Question 49

The larger the sample the greater the chance that two people will have been born on the same day.

Question 50

Investing in last year's best performing mutual funds may not be a winning strategy if the concept of "regression to the mean"prevails.

Question 51

Investors tend to assume more risk when confronted with losses versus gains.

Question 52

Investors tend to remember (anchor) the price paid for a stock.

Question 53

Investors tend to make disproportionate use of round number (e.g. $25.00)