1 / 22

Behavioral Finance

Behavioral Finance. Economics 437. Readings. Daniel Kahneman, “Thinking: Fast and Slow” Michael Lewis, “The Undoing Project”.

rristau
Download Presentation

Behavioral Finance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Behavioral Finance Economics 437

  2. Readings • Daniel Kahneman, “Thinking: Fast and Slow” • Michael Lewis, “The Undoing Project”

  3. Imagine that one in every thousand athletes use steroids. Imagine also that the test for steroids has a 5 % false positive rate. If a particular athlete tested positive for steroids what is the probability that that athlete was a steroid user • [0.001] • [0.020] • [0.65] • [0.95]

  4. A Dilemna • US is preparing for the outbreak of an unusual foreign disease which is expected to kill 600 people • Program A: 200 people will be saved • Program B: 1/3 probability that 600 will be saved; 2/3 probability that no one will be saved

  5. Regression to the mean • Highly intelligent females tend to marry men who are less intelligent than they are • The correlation between the intelligence scores of spouses is less than perfect (and men and women do not differ in intelligence on average)

  6. Vagueness -- Game 1 Consider an Urn Containing: ½ red balls ½ green balls If you can pick a red ball you win $ 100, otherwise zero

  7. Vagueness -- Game 2 Consider an Urn Containing red and green balls, But we have no idea how many of each If you can pick a red ball you win $ 100, otherwise zero

  8. Insurance Distortions • Flight Insurance …. $ 100,000 coverage in case of • Terrorism $ 7.42 • Anything but terrorism $9.00 • Anything $ 7.44

  9. Buy me a beer! • From a resort • From a small country town store

  10. Fairness and “Reference Points” • Shortage of cars develops • Dealer raises prices $ 200 above list • 71 % unfair • Dealer has been selling these cars at a discount of $ 200 below list price. He now eliminates the discount • Only 42 % unfair

  11. Cutting wages • A small co employs several people. Workers’ incomes have been about average for the community. Business is slow. Owners reduce the workers’ wages by 10 percent for the year • 61 % unfair • A small co employs several people. The workers have been receiving a 10% bonus each year. Business is slow. Owners eliminate the bonus for the year. • 20 % unfair

  12. Tipping • Survey • A restaurant you visit frequently, bill is $ 10, what is the tip? • $ 1.28 on average • A restaurant in another city that you do not intend to return to • $ 1.27 on average

  13. Another Example • Can of insecticide costs $ 10 • Current risk level 15 out of 10,000 (injured) • What would you pay to eliminate the risk • Result of survey $ 3.78 • Same can but has no risk • What price reduction would be okay to have a 1 in 10,000 risk? • 77 % said they would refuse to buy the product at any price if the risk were increased

  14. Anchoring (the bag of marbles) • 50 red; 50 white • Probability of drawing a red marble • 90 red; 10 white • Probability of drawing (with replacement) 7 red marbles in a row

  15. Anchoring (the bag of marbles) • 50 red; 50 white 50% • Probability of drawing a red marble • 90 red; 10 white 48% • Probability of drawing (with replacement) 7 red marbles in a row • 90 red; 10 white 52% • Probability of drawing (with replacement) at least one white marble in 7 tries

  16. Going to the UVA Basketball Game • Paid $ 500 for a courtside ticket • As you try to enter, you realize you have lost the ticket • Someone offers to sell you another ticket for $ 500….would you buy it? • You are on the way to the basketball game and have decided to pay $ 500 for a courtside ticket • As you try to enter, you realize that you have lost two hundred dollar bills, but still have several left and can buy the ticket • Would you still buy the ticket?

  17. Another Dilemna • Program C: If adopted 400 people will die • Program D: 1/3 probability that no one will die and 2/3 probability that 600 people will die

  18. Sunk Costs • A man joins a tennis club and pays a $ 3000 yearly membership fee. After two weeks of playing, he develops a tennis elbow • He continues to play (in pain) saying: “I don’t want to waste the $ 300”

  19. Naïve Diversification • Four Choices: • Three Bond Funds • One Stock Fund • Put ¼ in each • Four Other Choices • Three Stock Funds • One Bond Fund • Put ¼ in each

  20. Perceptions of “Randomness”- an example of “representativeness” • In a population of families with exactly six children, which sequence of births is more likely: • B B B G G G • G B B G B G • School A has 65 % boys, School B has 45 % boys • You enter a class at random with 55 % boys • Is this class more likely from School A or School B?

  21. 20 marbles, randomly divided among five children I II Alan 4 4 Ben 4 4 Carl 5 4 Dan 4 4 Ed 3 4 In many rounds of random assignment, which of these results is more likely?

  22. The End

More Related