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Discussion Week 11: Watch the video and discuss. https://www.ted.com/talks/ colin_camerer_neuroscience_game_theory_monkeys Game theory People naturally do 1-2 steps of strategic thinking – using theory of mind Chimps are better competitors than humans In the video, “When you’re making a deal, what’s going on in your brain?”, speaker Colin Camerer, a leading behavioral economist, discusses neuroscience in relation to game theory and the decision-making process. Camerer explains that game theory predicts what people are likely to do and what others will do in cases where everyone’s actions affect everyone else. He provides a few examples to demonstrate how people interact socially when value is on the line. In his first example, the goal is to pick a number from 0-100 that is 2/3 of the average chosen by all. Camerer discusses how cognitive hierarchy theory can explain how many steps of strategic thinking people will typically use in this type of situation – typically 1 or 2 steps (1 Step individuals would likely choose 33 which is 2/3 of 50. 2 Step individuals would likely choose 22, which is 2/3 of 33, so one step further). Equilibrium analysis also plays a role with a prediction that everyone wants to be below everyone else, therefore, playing zero is the appropriate strategy. With a sample size of over 9,000, majority of people chose 33, 22, or 0/1 with most others within the range of 0-50 as well. The average was 23, so 2/3 of that would be close to 15. So, one would need to be a many-step player to predict this accurately and know that a certain percentage of people would be Step 1 vs. Step 2 vs. equilibrium analysis understanders. Another example explains how when comparing humans with chimpanzees, the chimps are better game theory competitors. Human choices differed from theoretical predictions more than that of the chimps. This is such an interesting finding to me. Ultimately, I think that it is likely tied to the fact that there is such a variation in human thinking. Some are quick to process – more like the chimps – while others are deep, overthinkers, and everything in between. Additionally, each time we get into a situation such as the examples provided, we may learn/adapt and then adjust our thinking accordingly, which then shifts the paradigm again. Ultimately, that means that it will be much more difficult to predict how humans with respond when our actions affect one another.

Discussion Week 10: Imagine that you are a divisional manager. Currently you are a member of a committee which is considering two product investments proposed by two other divisional managers: Joe and John. While walking over to the presentations, Joe seems rather arrogant. He mentions that he golfs with the CEO, is a key player in the firm, and that you could really learn a lot from him. In thinking over the projects after the presentations, you find you are really leaning toward John's proposal even though the projects are quite similar in terms of estimated cash lows and risks. How can you explain this? If both proposals are quite similar in terms of estimated cash flows and risks, then affect heuristic, affinity bias, and the halo effect may all play key roles in the decision-making process. While walking over to the presentation, Joe seemed rather arrogant which negatively affects my emotions towards his character. Affect heuristic describes how we often rely on our emotions, rather than concrete information, when making decisions. This can strongly influence my decision-making in the described scenario because I felt a negative emotion due to Joe’s arrogance. Therefore, although there may be many other factors that effect the validity of a project, the negative emotions felt towards Joe, in addition to the similarity of the project cash flows and risks, would likely influence me to have a preference to John over Joe. Affinity bias occurs when we show a preference for people who we perceive ourselves to be similar to. Due to affinity bias, with all other things equal, it is likely that I would choose the candidate that fits the culture of project and whom I perceive a connection to – i.e. John - rather than the person with whom I felt uncomfortable around – i.e. Joe. The halo effect is a type of cognitive bias in which our overall impression of a person influences how we feel and think about their character. Perceptions of a single trait can carry over to how we perceive other aspects of that person as well. So, when Joe displays arrogance, the halo effect would influence how I think of his character and may carry over into how I perceive his work ethic and abilities. Therefore, although the projects presented seem similar, the advantage would go to John, with whom I do not have a negative character impression of. Cherry, K. 2022, October. What is the Halo Effect? Very Well Mind. https://www.verywellmind.com/what-is-the-halo-effect-2795906 Nikolopoulou, K. 2023, January. What is Affinity Bias? Definition & Examples. Scibbr. https://www.scribbr.com/research-bias/affinity-bias/ The Decision Lab. 2023. Why do we rely on our current emotions when making quick decisions? Affect Heuristic, explained. https://thedecisionlab.com/biases/affect-heuristic

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Discussion Week 9: 19 December 2000 an article appeared in The Wall Street Journal discussing stock price declines that followed share repurchases made by AT&T, Intel, Microsoft, and Hewlett-Packard. The article mentions that Warren Buffett, chairman of Berkshire Hathaway, criticized firms that engaged in share repurchases. In a letter to shareholders, Buffett noted that share repurchases made sense during the mid-1970s, when many stocks traded below their intrinsic value. However, he argued that conditions changed during the bull market of the 1990s, even though share repurchases had become much more frequent. He also suggested that the motivation for share repurchases had also changed, and that during the 1990s firms bought back their shares in order to pump up their stock prices. Discuss Warren Buffett's views. Warren Buffet believes that companies should only repurchase their own shares if the stock price is below the intrinsic value. So, during the bull market of the 1990s, companies who bought back their own stock, paid more than the stock was worth. Since repurchases reduce the number of outstanding shares, this tends to lead to higher share prices/ earnings per share. But, ultimately, buying an overpriced stock is a poor long-term investment. Buffet believes that repurchases should only be considered when the market is down and stocks are undervalued, therefore creating value in the long-term. Banton, C. (n.d.). Share repurchase: Why do companies do share buybacks?. Investopedia. https://www.investopedia.com/terms/s/sharerepurchase.asp Stempel, J. (2023). Buffett’s Berkshire Hathaway speeds up stock buybacks. Reuters. https://www.reuters.com/markets/deals/buffetts- berkshire-hathaway-speeds-up-stock-buybacks-2023-03-19/

Discussion Week 8: Which corporate decisions are mostly affected by the behavioral biases of top managers? Why? Regardless of how rational or objective a person believes themselves to be, we are all prone to behavioral biases. The biases of top managers can dramatically impact a corporation. Some of the decisions that are most likely to be affected by the behavioral biases of top managers include: 1. Restructuring decisions. Conservatism bias causes a person to favor existing information over new information and can make change management particularly challenging for managers. Difficultly with replacing the “old way of doing things” can be perplexing, even if there are compelling reasons to change. 2. Financial and risk management decisions. Many biases can influence the financial and risk management decisions of top managers within a corporation. Herd mentality bias can cause an investor to follow the lead of others. Confirmation bias can cause an investor to only favor information that is in line with his or her beliefs. Loss aversion bias can cause an investor to limit risks in order to avoid potential loss; or conversely, overconfidence bias can lead an experienced investor to overestimate their abilities and knowledge which can lead to unnecessary risk. 3. Hiring decisions. Top managers may be influenced by affinity bias, which would cause the manager to be predisposed to hire individuals that are similar to themselves. 4. Marketing decisions. The affect heuristic can be influential in marketing as often times marketing messages rely on emotions, rather than concrete information, when making decisions. Ashworth-Keppel, T. (2021). Six Cognitive Biases That Affect Your Leadership. Australian Institute of Business. https://www.aib.edu.au/blog/leadership/six-cognitive-biases-that-affect- your-leadership/ Hayes, A. (2023). Behavioral Finance: Biases, Emotions and Financial Behavior. Investopedia. https://www.investopedia.com/terms/b/behavioralfinance.asp

Discussion Week 6: If employee-investors are unsophisticated and unlikely to be materially influenced by educational efforts, the best way to improve the welfare of employee-investors is pension design. Discuss. If employee-investors are unsophisticated and unlikely to be materially influenced by educational efforts, the best way to improve the welfare of employee-investors is pension design. This statement is true because an unsophisticated investor, by definition, does not have the knowledge and experience in business or financial matters to allow them the capability to evaluate the merits and risks of the transactions completed by a stockholder agreement (Law Insider, n.d.). As such, it would be best if the responsibility did not fall on employee-investor. A pension is best for this, because the investment and management risk is on the employer, while the employee is guaranteed a set income for life (The Investopedia Team, 2023). Employees do not have control of investment decisions with a pension plan, and they do not assume the investment risk. Instead, contributions are made by the employer to an investment portfolio that is managed by an investment professional. Additionally, even if the company declares bankruptcy or faces other financial problems, almost all private pensions are insured by the Pension Benefit Guaranty Corporation, so employee pensions are often protected, ensuring a significant amount of less market risk than other retirement plan options, such as 401(k) plans (The Investopedia Team, 2023). Law Insider. (n.d.). Non-sophisticated investor definition . https://www.lawinsider.com/contracts/5A6w2aNQx9N#non-sophisticated- investor The Investopedia Team. (2023, September, 9). 401(k) vs. Pension Plan: What’s the Difference? Investopedia. https://www.investopedia.com/ask/answers/100314/whats-difference- between-401k-and-pension-plan.asp

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Discission Week 5: Explain the nature of the following behavioral biases, if possible with some behavior of others you have observed in your life: A. Mental accounting B. Framing bias C. Availability bias D. Overconfidence bias Mental accounting refers to “the different values a person places on the same amount of money, based on subjective criteria” – for example – the value of a dollar being deemed more valuable when worked for versus when it is given as a gift (Segal, 2022). For example, when a person puts money into a “vacation jar” while still carrying credit card debt. Framing bias occurs when a decision is made based on the presentation of information rather than the facts of a situation (Vipond, 2019). In sales this is often seen if a new product is launched with a really intriguing advertisement, it is more likely to be bought, over a better product that is not advertised well. Availability bias is the tendency for someone to rely on information that is readily available or recalled easily in a given situation. For example, many people are scared of flying because news stories cover plane crashes more prominently than car crashes. But, in reality, a car crash is a much more likely cause of death than a plane crash. Overconfidence bias causes a person to think they are better at something than objective facts may justify. For example, a person thinking they are a great driver, Segal, T. (2022, November 30). Mental Accounting: Definition, Avoiding Bias, and Example. Investopedia. https://www.investopedia.com/terms/m/mentalaccounting.asp Vipond, T. (2019, April 15). Framing Bias. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/career-map/sell-side/ capital-markets/framing-bias/

Discussion Week 4: Explain the nature of the following behavioral biases, if possible with some behavior of others you have observed in your life: A. Anchoring bias B. Familiarity bias C. Representativeness bias Anchoring bias occurs when decision making is impacted by a person relying too much on the first data point or pre-existing information (Vipond, 2023). This most often occurs in my life when my husband I are shopping for a product. He would tell you it’s inevitable that I will walk into a store and without looking at the price tag first, I will automatically pick out the most expensive thing within a certain category as “the one I like the most.” So, our initial reaction is usually, “whoa, that’s expensive!” So, then when we look at similar products within that category, it seems more reasonably priced in comparison. But, if we went into the store and never saw the price of the more expensive product, we would likely still think the cheaper product was still too expensive. Since we have a comparison of a more expensive product though, it biases you into thinking it’s a good deal. Familiarity bias revolves around a person’s preference for familiar options over unfamiliar ones, even when the unfamiliar options may be better (Hreha, n.d.). The first thing that comes to mind for me in my life, is using an iPhone versus an Android. I have almost always had a iPhone and my sister as always preferred an Android. But, regardless of how many times my sister shows me the endless amount of additional features and photo quality improvements that her most up-to-date Android has, I just can’t make the switch. Apple has so many other convenient features and I don’t want to learn new how to use an Android to its full potential, so I will continue to use an iPhone for the foreseeable future. Representativeness heuristic bias is a mental shortcut used to estimate the probability of an outcome based on existing correlations/similarities believed to be between two objects or events (The Decision Lab, n.d.). I think this is evident in life when your friend or relative is describing a person to you that you’ve never met. They give you details about the person – what kind of job they have, approximate age, interests, etc. And in your head, you may use stereotypes to visual the person. I’ve found myself saying, “that’s not what I had him/her looking like in my head” after meeting one of my husband’s co-workers for the first time after hearing him tell me about his interactions with that person. Hreha, J. (n.d.). What is Familiarity Bias In Behavioral Economics? The Behavioral Scientist. https://www.thebehavioralscientist.com/glossary/familiarity-bias The Decision Lab. (n.d.). Why do we use similarity to gauge statistical probability? The Decision Lab. https://thedecisionlab.com/biases/representativeness-heuristic Vipond, T. (2023, June 13). Anchoring Bias. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/ anchoring-bias/

Discussion Week 3: Momentum is an anomaly that gives those subscribing in efficient markets the most trouble. What is Momentum in stock prices? Why is this a problem for the efficient market hypothesis? Momentum in stock prices shows the rate of change in price movement over a period of time. This helps investors determine the strength of a trend and whether it is bullish momentum in which the price of the stock is rising (indicating investors should buy shares) or bearish momentum in which the price is falling (indicating the investors should sell shares) (The Investopedia Team, 2021). The efficient market hypothesis suggests that share prices reflect all information and stocks trade at their fair market value on exchanges (Downey, 2023). Therefore, this hypothesis suggests that it is impossible to “beat the market” and the only way to obtain higher returns is by purchasing risky investments. Momentum in stock prices is a problem for the efficient market hypothesis because if the efficient market hypothesis were always true, investors would not be able to use bullish momentum trends to beat the market by obtaining higher returns. Downey, L. (2023, April 24). Efficient Market Hypothesis (EMH): Definition and Critique. Investopedia. https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp The Investopedia Team. (2021, March 4). Momentum Indicates Stock Price Strength. Investopedia. https://www.investopedia.com/articles/technical/081501.asp

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Discussion Week 2 : You own stock of Apple, and you read that they will be introduce the next generation of the iPhone in two months time. Will confirmation bias lead you to overreact positively, negatively or neither to this news? You should think whether the ownership of Apple stock implies you are already bullish about its prospects? Apple stock ownership and confirmation bias will likely lead to a positive overreaction to hearing the news that Apple will be introducing the next generation of the iPhone in two months time. Apple’s historical growth makes it one of the top stock investments in terms of reliability and most authoritative prediction sources project that its price will continue to increase for many years (Nawaz, 2023). Confirmation bias is defined as a person’s tendency to process information that supports or strengthens their beliefs or values (Casad & Luebering, 2023). It is likely that ownership of Apple stock does imply an already bullish outlook regarding its prospects, and as such, confirmation bias would likely lead an Apple stock owner to have overly positively expectations regarding their predictions of the future stock growth. Casad, B. & Luebering, J. (2023, August 18). Confirmation Bias. Britannica. https://www.britannica.com/science/confirmation-bias Nawaz, A. (2023, August 15). Apple (AAPL) Stock Price Prediction & Forecast 2023 – 2050. Fintech Guruji. https://fintechguruji.in/apple-stock-price-prediction-forecast/

Discussion Week 1: What is the difference between expected utility and prospect theories? Expected utility theory suggests that individuals will make decisions that maximize utility and benefit them most economically. Losses and gains are valued equally. When making a decision with uncertain results, expected utility theory states that an individual will calculate the probability of the expected outcome and weigh it against the expected utility, then chose the option with the highest expected utility (potential benefits) (Chen, 2021). Prospect theory is a part of behavioral economics, and as such, it does not focus entirely on utility. Amos Tversky and Daniel Kahneman, the developers of prospect theory, suggested that compared to the expected utility theory, prospect theory is better at accurately describing how decisions are made (Chen, 2022). Prospect theory assumes that an investor would prefer to avoid a potential loss versus risking a potential gain. Additionally, due to zero risk bias and loss aversion, prospect theory suggests that individuals tend to choose options with more certain outcomes and tend to avoid risk even at the expense of potentially gaining more, respectively (The Decision Lab, n.d.). For example, prospect theory suggests that when given the choice between being given $25 outright versus being given a 50% chance of winning $50, most people would take the $25 even though the expected value of the two options is the same (Chen, 2022). Chen, J. (2021, May 7). Expected Utility: Definition, Calculation, and Examples . Investopedia. https://www.investopedia.com/terms/e/expectedutility.asp Chen, J. (2022, July 22). Prospect Theory: What It Is and How It Works, With Examples. Investopedia. https://www.investopedia.com/terms/p/prospecttheory.asp The Decision Lab. (n.d.). Prospect Theory. https://thedecisionlab.com/reference-guide/economics/prospect-theory

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