Investing PI 5

Investing PI 5 - in positive frame while risky ones in...

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How a question is worded or framed, causes people to react differently. A negative framework will cause less people to choose the option while a positive framework with the same results will be chosen more frequently. The framework of an option is also combined with anchoring leads people to respond differently than when people do not have something to anchor on. Leverage is the use of debt in a business's capital structure, the more leverage use the more debt a company has and thus it is riskier. Firms with poor growth prospects are often identified by their high book-to-market (B/M) ratio. Intuitive mode is spontaneous and effortless compared to analytical which is deliberate and effortful. The prospect theory suggests people tend to take certain options
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Unformatted text preview: in positive frame while risky ones in negative frames. The cognitive reflection test (CRT) reveals whether a person is an intuitive thinker or analytical thinker, an impulsive thinker will instantly give an answer while an analytical thinker will take time to determine the correct answer. Based on a study by Shane Frederick, who created the CRT test, he found out that analytical thinkers and intuitive thinker will switch selections based on framework even with some results. People with opt-in pension plans or 401 k will have a higher percentage of not participating if they are overwhelmed with the amount of mutual funds offered....
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This note was uploaded on 09/13/2011 for the course FIN 250 taught by Professor Johansen during the Fall '10 term at Boise State.

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