Rational/Irrational Quiz

Behavioral finance assumes investors are irrational while traditional assume investors are rational?

ts ts ts. traditional assumes market are rational not investors ts ts ts Schweser :-/ i need to double check that myself

True, if by rational you mean Rational decisions.

I thought it is true too but schweser got all defensive that is all about rational market and not investors dunno what the means have to read

False you need to swap investors for markets, doesn’t make sense that a market can be irrational but the investors aren’t.

It doesn’t say irrational. It says they are biased, loss averse, and practice asset segregation.

behavioral finance assumes investors are irrational? I don’t know but even the investor does not know how to solve a damn utility maximization problem with all the exact estimates of means and variances of all security returns, it doesn’t mean that investor is irrational. This question is tricy cause irrationality is not well defined.

No according to the assumptions used for Individual PM (chapter) there is the contrast of traditional theory (rationality) vs behavioral (irrational), or more specifically there is Loss Aversion, Biased Expectation and Asset segregation. Biased expectation is a type of irrationality, could be exhibited by overconfidence, herding behavior or ebullience cycle (or any number of others).

so James are you saying True?

Asset segregation = mental accounting i guess James can you please tell me the page where this can be found?