Download Behavioral Finance: The Role of Psychology in Financial Decisions and more Slides Marketing in PDF only on Docsity! Behavioral Finance The Role of Psychology docsity.com Questionnaire, Part I Give 90% Confidence Interval 1. How much does the Statue of Liberty weigh, in tons? (entire steel-reinforced copper figure) 2. What is the 2000 population of Turkey? 3. How many square miles in Sahara Desert? 4. Endowment of Yale University as reported in 1998-9 Support of Education Survey? 5. How much, in dollars, does one receive if one wins the Pulitzer Prize (2001)? docsity.com Prospect Theory • Kahneman and Tversky, Econometrica 1979 • Two elements, value function and weighting function • Elements replace utility function and probabilities in expected utility theory docsity.com VALUE
LOSSES GAINS
FIGURE 3.—A hypothetical value function.
docsity.com
Samuelson’s Lunch Colleague • Paul Samuelson offered two-to-one odds to his colleague: colleague wins $200 if heads, loses $100 if tails. Colleague refused bet. • Samuelson asked him if he would take 100 such bets. Colleague said yes. • Samuelson proved mathematically that his colleague was not rational (from expected utility theory). [Scientia 98:108-13, 1963] docsity.com Cognitive Dissonance • Mental conflict that occurs when one learns one’s beliefs are wrong, avoidance behavior • Ads for recently purchased cars • Disposition effect docsity.com Wishful Thinking Bias • People exaggerate probability that their team will win. • People exaggerate probability that the candidate they favor will win. docsity.com Attention Anomalies • Attention is fundamental aspect of human intelligence and its limits • Social basis for attention • Inability to account for one’s attention • “No arbitrage assumption” of financial theory: No ten-dollar bills lying around. Does not require everyone is paying attention. docsity.com Representativeness Heuristic • People judge by similarity to familiar types, without regard to base rate probabilities (sensitive, artistic woman, sculptress or bank teller) • Tendency to see patterns in what is really random walk docsity.com Disjunction Effect • Inability to make a decision that is contingent on future information • Shafir & Tversky: People who took one of Samuelson’s lunch colleague bet were asked if they would take another. Most took the second bet whether or not they won the first. But most would not take second bet before outcome of first was known. • Reaction of stock market to news docsity.com Gambling Behavior • 61% of US adults gambled in 1974. • 1.1% of men and 0.5% of women are compulsive gamblers • Gamblers’ Anonymous • Gambling associated with self esteem and competence • Generates an aroused state that chases away cares docsity.com Quasi Magical Thinking II • Langer: People bet more on coin not yet tossed. • People pay more for lottery ticket in which they choose the number docsity.com Culture and Social Contagion • Social cognition, collective memory • Durkheim, 1897, suicide rates differ across countries for no more reason than different cultural themes • A global culture in today’s world docsity.com
