Three concepts of behavioral finance which is demonstrated in the comments of Pierce and explain each concept. Discuss how these concepts will be challenged by the investor practicing traditional or standard finance. Introduction: Overconfidence refers to the behavioral bias which stand dangerous, especially in the financial markets. It was assumed that overconfidence does not impact the investor, however the more the investor is overconfidence the more it will impact. In other words, it depicts underestimation of risk, overestimation of knowledge and exaggerating the ability of controlling the events. Loss aversion reflects the tendency of the people to avoid incurring losses for earning equivalent amount of gains. For instance the investors that possess behavioral characteristics of loss aversion find it optimum to find $5 but not to lose $5. This principle also stands important in economics domain. Reference point stands to be one of the keys in the world of behavioral finance to understand that the outcomes are evaluated by the people in relation to a relative point and then the classification of loss and gain is done.

Question

Want to see the full answer?

Answer 1

Question

Chapter 12, Problem 5CP

Summary Introduction

To determine:

Three concepts of behavioral finance which is demonstrated in the comments of Pierce and explain each concept. Discuss how these concepts will be challenged by the investor practicing traditional or standard finance.

Introduction:

Overconfidence refers to the behavioral bias which stand dangerous, especially in the financial markets. It was assumed that overconfidence does not impact the investor, however the more the investor is overconfidence the more it will impact. In other words, it depicts underestimation of risk, overestimation of knowledge and exaggerating the ability of controlling the events.

Loss aversion reflects the tendency of the people to avoid incurring losses for earning equivalent amount of gains. For instance the investors that possess behavioral characteristics of loss aversion find it optimum to find $5 but not to lose $5. This principle also stands important in economics domain.

Reference point stands to be one of the keys in the world of behavioral finance to understand that the outcomes are evaluated by the people in relation to a relative point and then the classification of loss and gain is done.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

What does the term "working capital" refer to?A) Long-term investments of the companyB) Total assets of the companyC) Current assets minus current liabilitiesD) Total liabilities of the company

Which of the following represents the primary goal of financial management?A) Maximizing profitsB) Minimizing costsC) Maximizing shareholder wealthD) Maximizing market share

Let S = $100, K = $95, r = 8% (continuously compounded), σ = 30%, δ = 0, T = 1 year, and n = 3. Verify that the binomial option price for an American call option is $18.283. Verify that there is never early exercise; hence, a European call would have the same price. Show that the binomial option price for a European put option is $5.979. Verify that put-call parity is satisfied. Verify that the price of an American put is $6.678. Please show this step by step and include formulas so that I can follow along. thank you.