Behavioral Finance Term Papers

Behavioral Finance Term Papers-24
The literature indicates that even experts in their respective fields fall prey to cognitive biases.It is important for advisors and wealth managers to be aware of biases and mental shortcuts that can impact their decisions.

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Turning to the stock market, investors are prone to keep losing stocks, hoping they will rebound, and are more likely to sell gaining stocks, afraid of a potential downturn.

Historical data indicate that the momentum of a gaining stock is likely to continue and those with a negative return should be sold off.

However, when these figures enter the negative domain, people prefer the 80% chance of losing $4,000 over the certainty of losing $3,000.

The existence of this phenomenon can be explained by another tenet of prospect theory: probability weighting.

A 50/50 chance of winning or losing $100 is deemed too risky.

In order to be comfortable with the bet, people require a better upside—on average one that’s twice the size of the loss.

Libertarian paternalism refers to the idea that organizations, both public and private, should have the right to influence behavior while still retaining people’s freedom of choice.

Thaler asserts that small nudges in both the public and private sector can benefit those who are prone to making these systematic errors at little to no cost to the more sophisticated decision-makers.

Thaler was recognized in 2017 for his research illustrating that individuals depart from rationality systematically.

In other words, when people behave “irrationally”—in an economic sense—they do so consistently, meaning this behavior can be categorized and modeled.


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