Study Session 3: Behavioral Finance

Hi Guys,

I’m stupmed by this. It’s so confusing and overlapping- I do not know which bias is what anymore.

Any suggetions-as to how to tackle questions on the exam on behavioral ?

Thanks Continue reading

Both conservatism and base rate neglet seems to tell me the same thing- overweight new info, and underweight old info.

So are both of these biases same? If not what is the difference? Thanks. Continue reading

It is stated that quantitative elements of prospect theory resembles the expected utlity theory except for these differneces- 1) Values are attached to changes rather than the final states 2) decisions weights need not coincide with the probability. I don’t understand the second point here. Can somebody please explain? Thanks. Continue reading

I have a hard time understanding Decision theory.

Schweser says that it is focussed on making the ideal decision when the decision maker is fully informed, mathematically able, and rational. This is the same as Expected utility theory right? So what is the difference then?

Also CFAI says decision theory and expected utility theory are normative. And the following paragraph states that the practical application of decision theory is prescriptive. This seems contradictory to me. Somone please explain. Thanks. Continue reading

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The answer is C but I don’t see how. BPT seems more about pyramiding and allocating capital based on importance of the goal. 

Any help much appreciated. thanks Continue reading

Can someone direct me , how I can see old discussions prior to 2009 ? Have they archived old and gold discussions ? if so can you give the URL ?

Thanks Continue reading

CFAI Vol 2 pg 38 says “The greater the concavity of the utility curve, the earlier the satiation of a specific security. Thus, the greater the concavity of the utility curve, the greater the number of securities included in the layer”.

Can someone explain why this is the case? I don’t seem to understand the relationship between the concavity of the utility curve and the number of assets in the layer. Continue reading

CFAI Vol 2 pg 33 says “A buy signal is generated when the price penetrates the resistance level, and a sell signal is generated when the price penetrates the support level.”

As far as my understanding goes, the resistance level is the level at which the investors believe the stock is overpriced.This should mean a sell signal will be generated right? The book says otherwise. Please clarify. Continue reading

Schweser Book1 pg 169 says this- “Most investors are risk averse when presented with gains. Given an equal chance of making $100 or losing $70, most individual will not take the test. They are risk averse and want a higher expected payoff than $15. However, most individuals are risk seekers when confronted wtih likely losses. Offered the choice of sure loss of $75 or a 50/50 chance of winning $30 or losing $200, they exhibit risk-seeking behavior by taking the bet that has an expected payoff of -$85. The bet is worse than the sure loss of $75.” Continue reading

Hello guys. I have trouble in understanding the utility function of Risk averse investors and risk loving investors. It is stated that the utility function for risk averse investor is concave with a diminishing marginal utility of wealth. Can someone explain me why this is the case? Also why is the function convex for risk seeking investor? The explanation provided in CFAI and schweser materials goes over the top of my head!

Thanks in advance. Continue reading