Bias Definitions and Implications

Solution Analysis

• A. Self-Control Bias

  • Definition: This bias occurs when individuals prioritize immediate gratification over their long-term goals.

  • Example: Choosing to eat dessert instead of sticking to a diet plan, despite knowing the long-term health benefits of eating healthier.

  • Conclusion: This statement is correct because it accurately describes the nature of self-control bias.

• B. Endowment Bias

  • Definition: An emotional bias where individuals place a higher value on an item simply because they own it, compared to how much they would value the same item if they did not own it.

  • Example: A person may refuse to sell a concert ticket for a fair market price because they own it, despite the fact it holds no value to them if they don’t attend.

  • Conclusion: This statement is incorrect because endowment bias is unrelated to prioritizing short-term needs over long-term goals.

• C. Loss-Aversion Bias

  • Definition: This refers to the behavior where individuals prefer to avoid losses than to acquire similar gains. It reflects a stronger emotional reaction to losses compared to gains of the same size.

  • Example: An investor may hold onto a losing stock to avoid realizing a loss, rather than selling it at a loss and reinvesting in a more promising stock.

  • Conclusion: This statement is incorrect because loss-aversion bias does not relate to acting in favor of short-term satisfaction instead of long-term strategies.

  • Causes Overreaction in the market

• Regret aversion bias - emotional bias in which people tend to avoid making decisions out of fear that decision will turn out poorly

• Mental accounting bias - refers to mentally dividing money into accounts that influence decisions

• Cognitive dissonance - belief perserverance results from mental discomfort that occurs when new information conflicts with previously held beliefs