Thursday, March 25, 2010

Behaviorial finance psychology terms and common errors

1. Conformation bias: refers to the way we check a hypothesis by observing instances that confirm it and ignoring those that don't.

2. Anchoring effect: example is the 52 week high and making sell or buy decisions based on that.

3. Availability error : is the inclination to view any story, whether political, personal, or financial, through the lens of a superficially similar story that is psychologically available.

4. status quo bias: not doing anything in an uncertain situation even though one is losing.

5. endowment effect: is an inclination to endow one's holdings with more value than they have simply becuase one holds them." its my stock and I love it."

1.  passively endured losses induce less regret than losses that follow active involvement.
2.  people feel considerably more pain after incurring a financial loss than they do pleasure after achieving an equivalent gain. In the extreme case, desperate fears about losing a lot of money induce people to take enormous risks with their money.
3. It's not only in casinos and the stock market that we categorize money in odd ways and treat it differently depending on what mental account we place it in.

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