Behavioral Finance Final Examination Practice Flashcards

A set of 50 vocabulary flashcards covering the concepts, biases, and investor types discussed in the Behavioral Finance final exam notes.

A bias exhibited by people who do not like to gamble when probability distributions seem uncertain.

Ambiguity Aversion

A mental process in which a differential weight is placed on the value of an object, causing people to value an asset more when they hold property rights to it.

Endowment Bias

A human behavioral tendency that causes people to fail to act in pursuit of their long-term goals because of a lack of self-discipline.

Self-Control Bias

The tendency of investors to adopt an inside view, in lieu of the more appropriate outside view, when making financial decisions.

Optimism Bias

Describes people's tendency to code, categorize, and evaluate economic outcomes by grouping assets into non-fungible mental accounts.

Mental Accounting Bias

A type of selective perception that emphasizes ideas that confirm our beliefs while devaluing whatever contradicts our beliefs.

Confirmation Bias

The impulse that insists 'I knew it all along!'; the tendency to falsely believe an event's outcome was predicted after it occurred.

Hindsight Bias

Developed by Kahneman and Tversky in $20521$, this bias can cause investors to sell winning positions too early while holding losing ones too long.

Loss Aversion Bias

A cognitive predisposition causing people to recall and emphasize recent events more prominently than those in the distant past.

Recency Bias

An emotional bias where decision makers avoid taking decisive actions because they fear the selected course will prove less than optimal.

Regret Aversion Bias

The tendency of decision makers to respond to various situations differently based on the context or presentation of a choice.

Framing Bias

An emotional bias that predisposes people to elect options that ratify or extend the existing condition rather than alternatives that bring change.

Status Quo Bias

Researcher who used Expected Utility Theory to perform a classic ambiguity aversion experiment.

Daniel Ellsberg

A researcher who reported results in $1899$ from experiments designed to examine endowment bias.

J. L. Knetsch

Scholars who described optimism bias in technical terms, hailing from Princeton University and the University of New South Wales, respectively.

Daniel Kahneman and Daniel Lovallo

A theory by Shefrin and Thaler submitting that people mentally allocate wealth into current income and current assets.

Behavioral Life-Cycle Theory

The framework through which the technical description of self-control bias is best understood.

Life-Cycle Hypothesis

A sub-categorical phenomenon of framing bias where people focus too restrictively on one or two aspects of a situation.

Narrow Framing

To understand recency bias, one must examine the primacy effect and the recency effect.

Memory Recall Components

A principle to which status quo bias contributes, though inertia itself is noted as not being as strong as the bias.

Inertia Principle

A characteristic an advisor should attempt to identify before investing a client's money.

Risk Tolerance

A popular investment strategy among some individual investors and investment professionals.

Dollar-Cost Averaging

An investment principle involving systematically selling winners and buying losers on a periodic basis.

Rebalancing

A special challenge for all investors that is detrimental and unforgiving to an investment portfolio.

Inflation

The tendency of stock market winners to keep winning and losers to keep losing relative to their peers.

Momentum

An economic theory based on the assumption of investor rationality.

Efficient Market Hypothesis (EMH)

Investors who tend to exhibit emotional biases.

High Wealth Level Investors

Investors who tend to exhibit cognitive biases.

Low Wealth Level Investors

Biases that an advisor should moderate, as they can be corrected with education and advice.

Cognitive Biases (Advisor Action)

Biases that an advisor generally must adapt to, creating a portfolio the client can adhere to and be comfortable with.

Emotional Biases (Advisor Action)

Passive investors who place a great deal of emphasis on financial security and preserving wealth rather than taking risks.

Preserver

Typically passive investors who do not have their own ideas about investing.

Follower

Active investors with medium-to-high risk tolerance who are strong-willed and independently minded thinkers.

Independent

The most aggressive behavioral investor type; active investors with medium-to-high risk tolerance.

Accumulator

Emotional primary bias.

Preserver Primary Bias

Cognitive primary bias.

Follower Primary Bias

Cognitive primary bias.

Independent Primary Bias

Emotional primary bias.

Accumulator Primary Bias

Low risk tolerance level.

Preserver Risk Level

Low to medium risk tolerance level.

Follower Risk Level

Medium to high risk tolerance level.

Independent Risk Level

High risk tolerance level.

Accumulator Risk Level

Regret aversion, overconfidence, and self-control biases.

Vhong's Biases

Loss aversion, anchoring & adjustment, and mental accounting biases.

Jhong's Biases

$50$ percent stocks, $40$ percent bonds, and $10$ percent cash.

Vhong's Proposed Allocation

$75$ percent bonds, $15$ percent stocks, and $10$ percent cash.

Jhong's Rational Allocation

The decision maker's conception of the acts, outcomes, and contingencies associated with a particular choice.

Decision Frame

Specifically described as an experience of an optical illusion.

Visual Framing Bias

A category of biases of which hindsight bias is considered perhaps the most pronounced version.

Belief Perseverance Biases

The framework by Kahneman and Tversky that provides the technical definition of loss aversion.

Prospect Theory ($1979$)