Investing PI 4

Investing PI 4 - higher tendancy to keep their money in...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
A house-money effect is where individuals are willing to take more risk if the money is won. The snakebite (or risk aversion) effect is when an individual loses, they are less likely to continue to take the risk. Attempting to break even is dominant compared to the snakebite effect. People will be more prone to accept a double or nothing to attempt to gain their losses back even if the odds are not fair. This effect is a result of both the house-money and snakebite effect, if people are up, they will be more likely to take higher risks since they see it as the house's money and losers will take higher risks to earn it back since they don't have much more to lose. Overall, winners will take higher risks than losers will. Another effect that alter peoples' decision is the endowment effect. People who own something want to keep it rather than part with it but if they do part they want more for their possessions to compensate for the pain of parting with it but experienced dealers seem to suffer less from the effect. Also known as the status quo, people will have a
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: higher tendancy to keep their money in what they own rather than change it, even if the risk is not suitable for the person. In example, someone who receives a bonus will be more likely to put it in the stock market compared to someone who receives the same amount of money from an inheritance will put it in a bond. Also, if the decision becomes too difficult they will likely keep it where it is, the status quo. People also have a hard time assessing risk to their true value which could be fatal in their retirement. Memory plays a part in investing, good and bad times will be overhyped and will lead one to avoid or invest more in similar situations. Immediate drastic changes will stick more than gradual yet larger changes. Cognitive dissonance is when the brain blocks out a contradicotry though to maintain an individual's self-image. People tend to think they performed better than they actually did as a result....
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online