question archive Read the information below and answer the question below: Relieved to have completed your first assignment, you head out to JoJo's Tavern for a couple pints with some fellow associate consultants
Read the information below and answer the question below: Relieved to have completed your first assignment, you head out to JoJo's Tavern for a couple pints with some fellow associate consultants
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Read the information below and answer the question below:
Relieved to have completed your first assignment, you head out to JoJo's Tavern for a couple pints with some fellow associate consultants. Your colleagues brief you on some basic office politics and you share some details of your conversation with Miss Jones. The conversation turns to investing as the past several years have been very good financially for your new colleagues. During your conversation, several of your colleagues' comments seemed to demonstrate commonly known biases in behavioral finance. The most interesting of these are listed below. 1. "My father was a buy-and-hold investor but I am an active trader. To keep trading costs low, I use an online brokerage firm. I have done well investing in technology companies because I know the industry." 2. "I am holding a large position in Omega Corporation with a large unrealized loss. Omega's stock price declined last year when reported sales and earnings failed to meet analyst expectations. I took advantage of the decline to increase my position." Omega sales growth has continued to slow over the last year, but I believe the stock is still a good investment." 3. "I read a newspaper article reporting that commercial property values in the city have increased 14 percent annually since 2000. According to the article, the average commercial property in the city sold for $1.5 million last year. This makes me very happy because I just purchased a piece of commercial property last month. There is no doubt that it will be a good investment."
Question: Select the behavioral finance concept best exhibited in each of your colleagues' three statements at JoJo's bar. Explain how the behavioral finance concept you selected affects her investment decision making. Write your responses to these issues raised by your colleagues. Provide clarity, organization and completeness in your responses. This part should be between 1-2 pages in length.
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Answer:
Illusion control Bias:
The illusion of control rests at the heart of superstitious and pseudoscientific beliefs. It is belief that we are controlling events which are actually occurring independently of our behaviour. In the given case he knows the technology industry and he can control the outcome of technology stocks, which is a classic of illusion of control bias.
Hindsight Bias:
Another common perception bias is hindsight bias, which tends to occur in situations where a person believes that the onset of some past event was predictable and completely obvious, whereas in fact, the event could not have been reasonably predicted. In the given case, Omega’s stock price declined last year and failed to meet analyst expectations, took advantage of the decline to increase his position.
Confirmation Bias:
In investing, the confirmation bias suggests than an investor would be more likely to look for information which supports his/her original idea about an investment rather than seek out information that contradicts. As a result, this bias can often result in faulty decision making because one-sided information tends to skew an investor’s frame of reference, leaving them with an incomplete picture of the situation. In the given case, commercial property values in the city have increased 14% annually since 2000. He is expecting the trend to continue and in some time it may be wrongly representing.
