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Exam 22: Behavioral Finance: Implications for Financial Management

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Question 1

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Recently, a neighbor you have known for years won a lottery and received a $250,000 prize. This neighbor decided to invest all of his winnings in a new business venture that he knew only had a 5 percent chance of success. Previous to this, the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week. Which one of the following behaviors most applies to your neighbor's decision to invest in this business venture now?

A) Disposition effect
B) Affect heuristic
C) Gambler's fallacy
D) House money
E) Get-evenitis

F) A) and B)
G) D) and E)

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Question 2

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Which one of the following statements related to market crashes is correct?

A) Financial market crashes are unique to the United States.
B) A market crash tends to occur within a week but have effects that last many years.
C) Once the market finally crashed in 1929, stock prices began a long period of steady increases.
D) The market crash of 1987 occurred on a day when trading volume was light indicating there were a limited number of irrational investors involved.
E) Actions in Washington, D.C., may have helped contribute to the market crash in 1929 but not to the 1987 crash.

F) A) and B)
G) A) and C)

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Question 3

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Bill feels that he possesses a good dose of "street smarts." Thus, he makes his business decisions based on how a project feels to him rather than taking the time to financially analyze a project. This type of behavior is referred to as:

Following the Crash of 1929, the stock market:

Over the past six months, you have watched as your parent's retirement savings have declined in value by 25 percent due to a severe financial market downturn. As a result, you have decided that you will never invest in stocks for your own retirement but will instead keep all of your money in an insured bank account. Which behavioral characteristic have you acquired as a result of the market downturn?

Phyllis is planning for her retirement in 15 years. She currently lives comfortably on $38,000 a year given that she is debt-free. Based on her family history she only expects to live ten years after she retires. Thus, she computes her retirement need as $38,000 a year for ten years. Which one of the following behaviors applies to Phyllis?

AB Industries is an all-equity firm that has $10 per share in cash and a book value per share of $12. At which one of the following market prices would you know with absolute certainty that the stock was mispriced?

You have a tendency to take credit for the decisions you make that have good outcomes even when those outcomes are out of your control. On the other hand, you blame bad luck for your decisions that turn out badly. Which of these terms applies to you?

Which one of these statements related to the Crash of 1987 is false?

Approximately what percent of its total value did the stock market lose on "Black Monday"?

Aivree wants to accumulate great wealth but she invests all of her funds in U.S. Treasury bills because she wants to avoid the potential losses she knows can occur in the stock markets. Aivree best illustrates which one of these characteristics?

The last six times you purchased a stock you earned high returns within one year. Thus, you believe you will have the same result with your next stock purchase. This is an example of which one of the following?

Which one of the following is given as a key reason why many of the dot-com companies failed following their IPO's?

Your friends are all investing in a start-up company. You, on the other hand, refuse to invest in the company because you don't know the odds of it becoming successful. Which behavioral characteristic are you displaying?

Ramon opened a combination laundry and dry cleaning establishment three years ago that is quite successful. He has considered expanding this business by opening another location but keeps putting off that decision for fear that the second location will not be a success. Ramon is currently displaying which one of the following behavioral characteristics?

Which one of the following is an investment risk that investors face in addition to firm-based risk and market-based risk?

Which one of the following statements is true?

Which term refers to the tendency to shy away from the unknown?

The tendency for a decision maker to search for reassurance that a recent decision he or she made was a good decision represents which one of the following characteristics?

Consumer Marketing just conducted a two-phase survey. In the first phase, the survey questions were worded such that the answers tended to sound positive. In the second phase, the survey questions were reworded so the answers tended to convey a negative feeling. Both sets of survey questions should have resulted in similar results as the information solicited was essentially identical. However, the survey results varied significantly. This survey best illustrates which one of the following?