Financial Analysis. Lesson 40. Behavioral Economics and Market Psychology

Financial Analysis. Lesson 40. Behavioral Economics and Market Psychology

1. Behavioral economics studies how psychological factors influence economic decisions.

2. Anchoring bias relies on initial information, impacting financial decision-making.

3. Loss aversion describes stronger reactions to losses than to equivalent gains.

4. Overconfidence bias leads investors to overestimate knowledge and control over outcomes.

5. Herd behavior occurs when individuals mimic the actions of the majority.

6. Mental accounting categorizes money separately, affecting spending and investing habits.

7. Disposition effect encourages investors to sell winning assets too early.

8. Endowment effect values owned items higher than identical unowned items.

9. Framing effect changes decisions based on presentation of information.

10. Prospect theory explains why people weigh potential losses differently from gains.

11. Availability bias relies on recent examples, impacting investment decisions.

12. Recency bias gives more weight to recent events over long-term data.

13. Self-attribution bias attributes success to skill and failures to external factors.

14. Status quo bias prefers maintaining current investments over making changes.

15. Hindsight bias makes past events seem predictable after they occur.

16. Regret aversion avoids decisions that could lead to future regret.

17. Narrative fallacy favors compelling stories over statistical analysis in decisions.

18. Confirmation bias searches for information supporting pre-existing beliefs.

19. Sunk cost fallacy bases decisions on irrecoverable past investments.

20. Cognitive dissonance discomfort arises when new facts contradict existing beliefs.

21. Optimism bias leads investors to expect positive outcomes despite risks.

22. Ambiguity aversion avoids decisions where outcomes are uncertain or unknown.

23. Time inconsistency affects decision-making when short-term benefits outweigh long-term gains.

24. Reference dependence assesses gains or losses relative to a set point.

25. Salience bias highlights prominent events or data, influencing perception.

26. Overreaction causes exaggerated response to recent news or market events.

27. Underreaction minimizes response to new information, delaying market adjustments.

28. Pattern recognition sees trends in random data, impacting financial choices.

29. Myopic loss aversion emphasizes short-term losses over long-term potential gains.

30. Affect heuristic uses emotions rather than logic in decision-making.

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Technical Examples:

1. Anchoring bias influences pricing expectations based on initial price exposure.

2. Prospect theory helps explain investor risk aversion in uncertain markets.

3. Disposition effect encourages premature selling of assets, impacting portfolio growth.