Behavioral finance

Which axiom does the A-D error violate?

• Dominance

• Invariance

• Independence

Choosing vs. Pricing: preferring one option, but being willing to pay more for the other, violates which axiom?

• Invariance

• Independence

• Dominance

• Dominance

• Invariance

• Independence

If so, which of the following best explain his greater disappointment?

• The Disposition Effect

• Omission Bias

• Loss Aversion

• Risk Aversion

This visual illusion could serve as a metaphor for the violation of which Axiom?

• Dominance

• Independence

• Invariance

Let’s assume we all have preferences that are consistent with Prospect Theory. Suppose also that we could select whether our salaries are paid on a weekly basis or a monthly basis. Which alternative would we pick, assuming that the total monthly salary is the same as the sum of the weekly payments? Ignore the impact of extra interest that we could earn in our bank accounts if we were paid on a more frequent basis.

• Weekly

• Monthly

Now suppose you have the option to pay your utility bills on an annual rather than a monthly basis. Assume that you have enough money in the bank that you could pay the annual bill (which is simply the sum of all of your monthly bills) without running an overdraft or taking out a loan.

If your choices are consistent with Prospect Theory preferences, would you choose to do so? Once again, ignore the impact of any interest that you would earn (or forego).

• Annually

• Monthly

Suppose there are two investors: Michael and Steve. Both have pension funds, into which they deposit money each month from their paychecks. Both are in their early 30s, and anticipate retiring at around age 65. Neither anticipates withdrawing any money from his pension fund prior to retirement.

Michael watches his pension fund closely, looking each week at whether has gone up or down in value. On a week to week basis, the US equity markets are down almost as often as they are up. Steve, on the other hand, only checks the value of his pension fund once every five years or so. On a five-year basis, the US equity markets are down less than 10% of the time.

Michael’s pension fund money is all in bonds, while Steve’s is all in equities.

Which single feature of Prospect Theory provides the best explanation for the two men’s different portfolio allocations?

• Risk seeking over losses

• Risk aversion over gains

• Loss aversion

Which bias helps to explain why people like to go to all-inclusive resorts, where the entire cost of the vacation is paid upfront, and guests don’t have to pay for individual meals, drinks, activities etc., even though they know they will probably end up paying more for the all-inclusive than if they went to a regular resort?

• Loss Aversion

• Moving Reference Points

• Risk Seeking

• Risk Aversion

You were introduced to the Disposition Effect, which highlights the way in which many people’s preferences “flip” from Decision A to Decision D—even though A & C are identical, as are B & D. [Note: There is more than one correct answer]

• Risk seeking over losses

• Risk aversion over gains

• Loss aversion