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13 Cards in this Set

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  • Back

What is behavioural finance?

Seeks to identify and recognise the importance of cognitive factors that impact rational behaviour

What are the four reasons for irrational behaviour considered in behavioural finance?

1. Investor more likely to be upset with a less than expected return than pleased with a higher than expected return.


2. Investors will be over confident in a rising market and overly pessimistic in a falling market


3. investors may follow the herd into investments (if most investors follow the herd, economic fundamentals become less important as basis for price change


4. Investor may be distracted by trading noise

What are the three categories of investor behaviour formalised within the behavioural finance hypothesis?

1. Heuristic behaviour


2. Framing behaviour


3. Market inefficiencies

What is heuristic behaviour?

Where investors do not seek to maximise returns on investment, are willing to accept lesser returns. influenced by wide range of cognitive and emotional factors (not investing in tobacco companies because of health problems)

What is framing behaviour?

where investors are influenced by the manner in which an investment opportunity is presented (may invest in a thermal power project because of the potential for lower carbon emmissions, even though project is speculative)

What are market inefficiencies regarding behavioural finance?

Where factors create mispricing that cannot be supported or explained by rational expectations. (investor makes decision based primarily based on associated tax benefits rather than strength of investment)

What is the goal of behavioural finance?

Deals with individual investor psychology and how it affects individuals actions. understand how psychological decisions affect prices and to be able to predict these events

What is fusion investing?

integration of investment valuation on fundamental value and investor sentiment. identifies period of sentiment is strong and weak and alters investment strategy depending on sentiment

What is mental accounting?

Where people seperate decisions that could be combined. eg people willing to spend more on credit card than a cash purchase

What is representativeness?

IS where people underweight long term averages and put too much weight on recent events. eg. investor experiences negative return and assumes that is the norm, and previous highs are irrelevant.

What is conservatism?

Where investors rely on what has been previously and are reluctant to change views

What is momentum strategy?

Buying past winners and selling past losers. underweighs previous performance. short term strategy (less than 6 months)

What is contrarian strategy?

Buying losers and selling winners. overweight previous performance. long term strategy (two years or more)