...study od behavioral finance. According to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways. Asians in general suffer from cognitive biases, more so than Westerners, often being viewed as ‘Gamblers. Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions .It calls for investigation into higher mental processes, memory, perception, problem solving and thinking .This paper looks at some of the anomalies (i.e., irregularities) that conventional financial theories have failed to explain. In addition, review underlying reasons and biases that cause some people to behave irrationally. 2.- Brief survey of the literature The following areas of research have been covered, from the mid 1980’s to the main focus of the article(special edition 2008): Overreaction and Availability Bias, Overconfidence, Cultural difference, Superstition, education and life experience, “house money effect” managerial optimism, collective orientated vs individual dynamic, or Gambler's Fallacy, Trading venue affect, life experience and education, media influence, Herd Behavior, Gender influence and availability heuristic. While...
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...fertile ground for behavioral research. Prior studies have shown that analysts often suffer from a number of biases. However, the implications of these potential cognitive biases for investors and, even more so for managers, are less understood. This study considers the behavior of financial market participants from a perspective different from that of previous research. It focuses on anchoring bias, a topic that has been characterized by Hirshleifer (2001) as an important part of “dynamic psychology-based assetpricing theory in its infancy” (p. 1535). “Anchoring” describes the fact that, in forming numerical estimates of uncertain quantities, adjustments in assessments away from some initial value are often insufficient. One of the first studies of this cognitive bias is the seminal experiment by Kahneman and Tversky (1974). These authors report that estimates of an uncertain proportion (the percentage of African nations in the United Nations) were affected by a number between 0 and 100 that was determined by spinning a wheel of fortune in the subjects’ presence. Subsequent research (reviewed in Section 2) has confirmed the generality and the robustness of this cognitive bias. We hypothesize that market participants such as sell-side analysts and investors may also be affected by such anchoring bias when they estimate the future profitability of a firm. This estimation...
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...decision criteria and weights assigned to them are stable over time No time/cost constraints: full information is available Maximum payoff: the choice alternative will yield the highest economic value (a rational decision making process: define the problem—identify the criteria—allocate weights to the criteria—develop alternatives—evaluate the alternatives—select the best alternative Types of judgments and decisions: Normative: how X should be chosen/ judged in optimal/ rational conditions Descriptive: how X actually gets chosen/ judged The reasons why descriptive decisions are different from normative decisions: Bounded rationality: time cost constraints; incomplete information; perceptiual errors in obtaining information; cognitive load in information retention and performing caluculations Bounded decision making: We seek solutions that are the best given the information that is available; that are satisfactory (good enough) We satisfice rather than optimize Assumptions of bounded rationality: Limited search for criteria: rely on familiar criteria already in effect Limited review of alternatives: fous on easily found alternatives Satisficing: select the first alternative that is good enough Decision making—Biases and Fallacies in daily life: Biases: systematic distortions or patterns of error in judgment Fallacies: use of...
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...(NYSSA). He holds a BS in management from the University of New Hampshire and an MBA in finance from Tulane University. Pompian is a regular speaker on the subject of behavioral finance and has published several articles on the subject. He is married with three sons and can be reached at michael.pompian@mercer.com. “ Michael M. Pompian describes various biases which we can see in human beings , also tells about various experiments on human beings in his book “ BEHAVIOURAL FINANCE AND WEALTH MANAGEMENT “ and tells “HOW TO BUILD OPTIMAL PORTFOLIOS THAT ACCOUNTS FOR INVESTOR BIASES “ The book is published by John wiley and sons, inc. ,Hoboken , New jersey. Published simultaneously in Canada. The book was published in the year 2006 . SUMMARY : Understanding the use of behavioral finance theory in investing is a important topic these days. Nobel laureate Daniel Kahneman has described financial advising as a prescriptive activity whose main objective should be to guide investors to...
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...the entire period of writing this study. I would not be able to complete this research without their precious advice. Meanwhile, I would also appreciate Professor Yung-Ming Shiu’s encouragement and insightful comments on my proposal and final defense. I would like to also thank everyone at the Institute of International Management and Business Administration, National Cheng Kung University, who has contributed to the completion of this thesis. Finally, I would like to appreciate my family members, who have offered their constant support for my study here and thank them for be always by my side. Abstract Keywords: Personalities, Core self-evaluations, Extraversion, Herding behavior, Individual investors’ performance, Cognitive dissonance, Return, Satisfaction. This research examined the relationship among investor psychology, herding behavior and investment performance. Four hypotheses were tested using survey data collected from 250 individual investors in Vietnam stock markets. The findings showed that core self evaluations are positively related to herding behavior. In addition,...
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...THE JOURNAL OF FINANCE • VOL. LVI, NO. 4 • AUGUST 2001 Investor Psychology and Asset Pricing DAVID HIRSHLEIFER* ABSTRACT The basic paradigm of asset pricing is in vibrant f lux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models. The best plan is . . . to profit by the folly of others. — Pliny the Elder, from John Bartlett, comp. Familiar Quotations, 9th ed. 1901. IN THE MUDDLED DAYS BEFORE THE RISE of modern finance, some otherwisereputable economists, such as Adam Smith, Irving Fisher, John Maynard Keynes, and Harry Markowitz, thought that individual psychology affects prices.1 What if the creators of asset-pricing theory had followed this thread? Picture a school of sociologists at the University of Chicago proposing the Deficient Markets Hypothesis: that prices inaccurately ref lect all available information. A brilliant Stanford psychologist, call him Bill Blunte, invents the Deranged Anticipation and Perception Model ~or DAPM!, in which proxies for market misvaluation are used to predict security returns. Imagine the euphoria when researchers discovered that these mispricing proxies...
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...tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/contact.aspx Table of Contents 1) Behavioral Finance: Introduction 2) Behavioral Finance: Background 3) Behavioral Finance: Anomalies 4) Behavioral Finance: Key Concepts - Anchoring 5) Behavioral Finance: Key Concepts - Mental Accounting 6) Behavioral Finance: Key Concepts - Confirmation and Hindsight Bias 7) Behavioral Finance: Key Concepts - Gambler's Fallacy 8) Behavioral Finance: Key Concepts - Herd Behavior 9) Behavioral Finance: Key Concepts - Overconfidence 10) Behavioral Finance: Key Concepts - Overreactions and Availability Bias 11) Behavioral Finance: Key Concepts - Prospect Theory 12) Behavioral Finance: Conclusion Introduction According to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways. Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions. By the end of this tutorial, we hope that you'll have a better understanding of some of the anomalies (i.e., irregularities) that conventional financial theories have failed to explain. In addition, we hope you gain insight into some of the underlying reasons...
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...Sukanlaya, & Sung, Jessica (2013) Construal level and ingroup bias. In Toombs, L. (Ed.) 73rd Annual Meeting of the Academy of Management : Capitalism in Question, 9-13 August 2013, Lake Buena Vista (Orlando), Florida. This file was downloaded from: http://eprints.qut.edu.au/63905/ c Copyright 2013 [please consult the author] Notice: Changes introduced as a result of publishing processes such as copy-editing and formatting may not be reflected in this document. For a definitive version of this work, please refer to the published source: #10541, p. 1 CONSTRUAL LEVEL AND INGROUP BIAS Abstract The causal relationship between mental construal level and ingroup bias remains elusive. This paper uncovers a boundary condition and a mechanism underlying the relationship. We predict and find support for our hypotheses in four experiments conducted in East Asian and Western cultures. Data showed that a high- (vs. low-) level construal activated state belongingness, but had no effect on state rejection, state self-esteem, positive emotion, or negative emotion in participants from Korea (Experiment 1) and Australia (Experiment 3). Moreover, a high- (vs. low-) level construal triggered greater ingroup bias for Koreans (Experiment 2) and Australians (Experiment 3) primed with a relational self, but not for those primed with an independent self. This construal level effect on ingroup bias was eliminated when belongingness was primed at both a high- and...
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...MGMT 3720 Assignment #2 This is a case about an experienced ski instructor named Miranda. She seems to have developed a perception of her new boss is that he might be sexist. She feels that he might be overlooking more qualified female instructors for men. Perception is a process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment. (Robbins & Judge, 2013) I will be discussing Miranda’s perception of her boss and the factors that have influenced her judgment. I will talk about the way she sees her boss Hank and if there might be any errors in her judgment. Finally I will discuss what I believe this young ski instructor should do. Miranda’s perception of the situation is that her boss Hank does not treat the men and women fairly at the ski resort. Miranda might be correct as all the men instructors were assigned to adults while the women taught all the children The men instructor’s would report to Hank and the women to Hank’s Japanese wife Harika, 10 years his junior, and unable to speak English with confidence. (Cohen, Fink, Gadon, Wilits,, & Josefowitz, 2013) The only supervisor’s for the ski lodge would be men and all assignments would be handled through the front desk and that no instructors were to schedule own classes. The changing room for the instructors’ turned into a men’s locker room where inappropriate conversation became the norm and included Hank, Miranda’s boss. Hank had even begun to comment...
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... This perspective is sometimes also called “macro-OB”. 3. Two Types of Decisions- a. Programmed Decisions Routine Automatic processing b. Non-programmed Decisions 4. Satisficing- Choosing acceptable alternative to resolving a problem or pursuing an opportunity i. Not all alternatives are considered 5. Sources of Error in Decision Making- a. Cognitive Heuristics and Biases i. Availability – deaths in US, words in novel ii. Representativeness –conjunction fallacy, base rates, regression to mean-Linda eg iii. Anchoring and Adjustment –pay for beer, engineer’s salary iv. Framing –loss and gain b. Motivational Biases i. Confirmation Bias ii. Hindsight Bias iii. Escalation of Commitment iv. Positive (ego-centric) Illusions c. Emotion-related Biases i. Priming 6. The base rate fallacy, also called base rate neglect or base rate bias, is an error that occurs when the conditional probability of some hypothesis H given some evidence E is assessed without taking into account the prior probability ("base rate") of H and the total probability of evidence E. 7. The misconception of chance is another bias. Often, especially while gambling, we interpret a ‘normal’ event as rare, believing that chance will ‘correct’ a series of rare...
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...behaviors such as smoking and drug use, but there is little knowledge of how these insights relate to HIV prevention and care. We present novel evidence on the prevalence of the common behavioral decision-making errors of present-bias, overoptimism, and information salience among 155 Ugandan HIV patients, and analyze their association with subsequent medication adherence. 36 % of study participants are classified as present-biased, 21 % as overoptimistic, and 34 % as having salient HIV information. Patients displaying present-bias were 13 % points (p = 0.006) less likely to have adherence rates above 90 %, overoptimistic clients were 9 % points (p = 0.04) less likely, and those not having salient HIV information were 17 % points (p\0.001) less likely. These findings indicate that BE may be used to screen for future adherence problems and to better design and target interventions addressing these behavioral biases and the associated suboptimal adherence The Importance of BE Biases for Chronic Health Behaviors We focus on three key behavioral biases that have been found to influence health behaviors for other chronic conditions [9] and that we hypothesize may also be important to components of ARV adherence: Present-Bias A key behavioral bias is present-bias, which is the tendency of people to give into current temptation at the price of beneficial future outcomes [16]. For example, a seminal article by Benartzi found that people tend to delay the decision to save (e.g., to forego...
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...Management Behavior on InterClean-EnviroTech Merger The current essay has the intention to briefly analyze the merger situation between the two companies InterClean and EnviroTech, after the acquisition of the latter from the former organization. As a part of InterClean’s new strategy newly proposed solutions/service model, sales reps from both companies will be set into multi-functional teams taking advantage of all the expertise gathered mutually from these organizations in the Cleaning and Sanitation Industry. A merger or fusion between organizations is always a sensitive subject to deal with, since the human capital from the companies involved will experience a cultural, structural and managerial change that needs to be handled delicately during the transition, in order to impact the least on areas like employees social identity, behavior and attitudes toward organizational commitments, turnover intention of key players among the company, to name a few. Lipponen, J., Olkkonen, M., & Moilanen, M. (2004) explain the approach of social identity theories, by stating that they “share the same fundamental assumption that individuals define themselves in terms of their social group memberships and that group-defined self-perception produces distinctive effects on social behaviour and intergroup relations. This means that the more an individual conceives of him- or herself in terms of membership in a group or, in other words, identifies with the group, the more his or her attitudes...
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...Below are key definitions (terms) & concepts from the assigned readings and lecture slides. You should be familiar with them for Exam 1. The key definitions / concepts are not intended to be an all inclusive list of what will be on the exam. I also included the pages of the chapters that will be covered on the exam. I will not ask questions from chapter pages that do not fall in the ranges listed below. I will not ask questions from the “Skills & Best Practices” & “Hands On Exercises” sections in the OB textbook. I will not ask questions from the “HR How To”, “eHRM”, “Did You Know”, “Best Practices” & “HR Oops” sections of the HR textbook. Make sure you download the post-lecture slides from Carmen On page 4 of this study guide I have provided some example questions. Remember the likely sources of exam material: • Material Found in Book & Slides (found both places) – MOST LIKELY • Material Found Only In Slides (I have placed an ASTERISK on slides with non-book content that is exam material) • Material Found Only In Book (e.g. definitions, frameworks,…) Strategy & Strategic OB: K&K Chapter 1: Definitions (key terms): contingency approach, human capital, management, organizational behavior, social capital, Theory Y, total quality management Reading: p.5-16 (just the top of 16) Key concepts Human Relations Movement Theory X, Theory Y Total Quality Management Deming’s 85-15 Rule Contingency Approach Human Capital Social Capital Congruence...
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...dangerous certain biases and heuristics can become if left unchecked on a massive scale. Alex Blumberg and Adam Davidson, in collaboration with NPR News, put together a special program titled “The Giant Pool of Money,” where they explore just how the phenomenon occurred and the underlying factors that contributed through sound bites of those directly involved, affected, or simply aware of the situation as it unfolded. Based on descriptions of various biases and heuristics in Judgment in Managerial Decision Making (Bazerman, 2009), the two biases that prolonged and strengthened the housing crisis in a significant manner can be seen in the “Ease of recall” bias stemming from the “Availability Heuristic,” as well as the “Anchoring” bias coming from the “Confirmation Heuristic.” Bazerman and Moore define the “ease of recall” bias as one where “individuals judge events that are more easily recalled from memory, based on vividness or recency, to be more numerous than events of equal frequency whose instances are less easily recalled.” The housing market and real estate had been doing quite well since the “Dot-com” boom and bust had rattled markets in the late 1990’s. Housing prices were continually increasing, and “lots of people in the mortgage industry had this faith that housing prices in the US simply never go down.” (Glass, 2008) This sort of reliance on historical performance of the housing market created a false sense of security for banks, where in the worst case scenario,...
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...member of a particular social group (Biases) Category-based Acting on cognitive expectations and emotional reactions to a person's perceived membership in a particular social group Sterotyping (Comparative fit) Bias affirms the satisfaction of belonging to the right groups; individual autonomy is balanced against group identity. Optimal Distinctiveness Theory Bringing about the behavior in others that a biased perceiver expects Self-Fulfilling Prophecy The degree to which one accepts a hierarchy in which some groups rightfully have a commanding influence over others Social Dominance Hierarchy Similar to fundamental attribution error, as applied to groups Ultimate Attribution Error Attributing negative encounters with others to membership in a stigmatized group or others' biases against the stigmatized group to which one belongs Attribution Ambiguity Biases assigned to a person without intention, awareness, effort, or control, often based on subliminal cues Automatic bias Economic, political, military, or prestige-related threats to ingroup advantage that result in negative intergroup reactions Realistic group conflict theory Applying one’s cognitive expectations and associations about a group to a person Cognitive bias (stereotypes, prejudice, and discrimination are examples) Prejudice that is cool, indirect, automatic, unconscious, unintentional, and often gives reason for the perceiver to deny any bias Subtle prejudice Legitimizing current social arrangements, even at...
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