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Mental accoun-WPS Office

Mental

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17 views4 pages

Mental accoun-WPS Office

Mental

Uploaded by

leoton770
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Mental accounting: Mental accounting refers to the propensity for people to

allocate money for specific purposes.

Herd behavior: Herd behavior states that people tend to mimic the financial

behaviors of the majority of the herd. Herding is notorious in the stock market as

the cause behind dramatic rallies and sell-offs.

Emotional gap: The emotional gap refers to decision making based on extreme

emotions or emotional strains such as anxiety, anger, fear, or excitement.

Oftentimes, emotions are a key reason why people do not make rational choices.

Anchoring: Anchoring refers to attaching a spending level to a certain reference.

Examples may include spending consistently based on a budget level or

rationalizing spending based on different satisfaction utilities.

Self-attribution: Self-attribution refers to a tendency to make choices based on a

confidence in self-based knowledge. Self-attribution usually stems from intrinsic


confidence of a particular area. Within this category, individuals tend to rank their

knowledge higher than others.

Biases Studied in Behavioral Finance

Breaking down biases further, many individual biases and tendencies have been

identified for behavioral finance analysis, including:

Disposition Bias

Disposition bias refers to when investors sell their winners and hang onto their losers.

Investors' thinking is that they want to realize gains quickly. However, when an

investment is losing money, they'll hold onto it because they want to get back to even or

their initial price. Investors tend to admit their correct about an investment quickly (when

there's a gain). However, investors are reluctant to admit when they made an

investment mistake (when there's a loss). The flaw in disposition bias is that the
performance of the investment is often tied to the entry price for the investor. In other

words, investors gauge the performance of their investment based on their individual

entry price disregarding fundamentals or attributes of the investment that may have

changed.

Confirmation Bias

Confirmation bias is when investors have a bias toward accepting information that

confirms their already-held belief in an investment. If information surfaces, investors

accept it readily to confirm that they're correct about their investment decision—even if

the information is flawed.

Experiential Bias

An experiential bias occurs when investors' memory of recent events makes them

biased or leads them to believe that the event is far more likely to occur again. For

example, the financial crisis in 2008 and 2009 led many investors to exit the stock
market. Many had a dismal view of the markets and likely expected more economic

hardship in the coming years. The experience of having gone through such a negative

event increased their bias or likelihood that the event could reoccur. In reality, th

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