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Exam 22: Behavioral Finance: Implications for Financial Management

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Question 21

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Which one of the following refers to the fact that an individual may reply differently if a question is asked in an equivalent but different manner?

A) Loss aversion
B) Gambler's fallacy
C) Frame dependence
D) Overconfidence
E) Format reference

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

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Question 22

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You are the manager of a retail store. You believe the economy is in a recession and that sales for the month will be unusually slow. Since you have complete discretion over the pricing at your location, you decide to have a storewide sale and offer ten percent off all merchandise for a three-day period. You don't expect your superiors to criticize this decision as you believe they, along with the majority of the other store managers, feel the same way about the economy as you do. Which one of the following applies to you?

A) Recency bias
B) Law of small numbers
C) Gambler's fallacy
D) False consensus
E) Money illusion

F) None of the above
G) A) and C)

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Question 23

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Up until three years ago, A.C. Dime opened an average of ten new retail stores a year. One of every ten new stores had to be closed within two years due to poor sales. This 90 percent success ratio was fairly steady for over 30 years. Starting three years ago, the firm has opened 40 new stores and every one had significant profits within six months. Management believes their recent success is not just a random event and that all future stores will be profitable. Thus, the managers have decided to open a minimum of 15 new stores each year. The managers are suffering from:

Historical returns support which one of the following statements?

Anytime Ted analyzes a proposed project, he always assigns a much higher probability of success to the project than is warranted by the information he has gathered. Ted suffers from which one of the following?

You are a hard-charging manager who doesn't really like to sit at a desk for too long. You prefer to gather information quickly, make a decision, and move on to the next item on your agenda. Which one of the following applies to you?

Roger's Meat Market is a chain of retail stores that limits its sales to fresh-cut meats. The stores have been very profitable in northern cities. However, when two stores were opened in the south, both lost money and had to be closed. Roger, the owner, has now concluded that no southern-based store should be opened as it would not be profitable. Which one of the following applies to Roger?

You are employed as a commission-based sales clerk for a cosmetics retail store. You know that, on average, exactly 50 percent of the customers that enter your store will make at least one purchase. Thus far this morning, you have waited on eight customers without making a single sale. You are convinced that the next customer you wait on will buy something. This belief is known as:

Which one of the following best illustrates an error which you, as a project manager, might make due to confirmation bias?

Nadine made a business decision that turned out badly. In reflecting upon her decision, she decided it was a reasoning error that led to the faulty decision. Which one of the following areas of study best applies to this situation?

All of the following create limits to arbitrage except:

The tendency to sell winners and hold losers is known as the:

Jeremy believes he excels at picking stock winners and thus trades frequently. Which characteristic does he most likely represent?

Peter has successfully managed the finances of A.D. Leadbetter in a manner that has yielded abnormally high returns. Due to this success, Peter has decided to publish a newsletter for financial executives so that he can share his superior financial wisdom with others. There is a very real probability that Peter has which one of the following characteristics?

Assume you are an overconfident manager. You are most apt to do which one of the following more so than you would if you were not overconfident?

Kate tends to hold onto assets that have lost value in the hope that their values will increase in the future. Kate illustrates which one of the following?

Alice believes she can accurately forecast the future and makes business decisions based on this belief. Which characteristics does this belief represent?

You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts, he never would have opened the new store in Centre City. Which one of the following caused your boss to make a bad decision?

The last two promotions within a firm involved individuals who completed the same advanced managerial program. As a result, the company president has stipulated that all future management hires must be graduates of that program. This behavior is typical of someone who has which one of the following characteristics?

Marzella Corp. is analyzing a project that involves expanding the firm into a new product line. The project's financial projections will tend to have which one of the following characteristics if the person compiling those projections suffers from overoptimism?