L_Behavioral - Behavioral Finance: Implications for...

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Behavioral Finance: Implications for Financial Management
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Outline Introduction to Behavioral Finance Biases Framing Effects Heuristics Performance of Professional Money Managers
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Poor Outcomes A suboptimal result in an investment decision can stem from one of two issues: You made a good decision, but an unlikely negative event occurred You simply made a bad decision (i.e., cognitive error)
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Overconfidence Example: 80 percent of drivers consider themselves to be above average
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Overconfidence Business decisions require judgment of an unknown future Overconfidence results in assuming forecasts are more precise than they actually are
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Overoptimism Example: overstating projected cash flows from a project, resulting in a high NPV Overestimate the likelihood of a good outcome Not the same as overconfidence, as someone could be overconfident of a negative outcome (i.e., “overpessimistic”)
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How a question is framed may impact the answer given or choice selected Loss aversion (or break-even effect) Retain losing investments too long (violation
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L_Behavioral - Behavioral Finance: Implications for...

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