Choose two (2) Psychological Biases, elaborate them in your own understanding and give  examples. You can state your own experience as an example if possible. Make sure your  example is related to finance.  

2. Do you consider the Heuristic approach as a positive technique in making financial decisions?  

 

 

HERE ARE SOME INFORMATIONS THAT MIGHT HELP YOU TO ANSWER THESE QUESTIONS.

Psychological Biases  

a. Mental Accounting - It is also called Psychological Accounting. This deals with the  ordinary way of categorizing and/or separating money into different accounts. Individuals  tend to immediately invest and/spend money for a particular thing, without identifying  other expenses that are more important.  

b. Herd Behavior - This is simply the behavior of a whole group. This occurs when people act  uniquely from one another and make different decisions. In stock market, investors tend  to rally or argue because of their different decisions and choices.  

c. Emotional Gap - This occurs when people with anger or anxiety immediately make  decisions. People with this gap do not make choices logically or rationally. 

d. Loss aversion - This refers to an investor's possibility to avoid financial losses. Individuals  have fear to invest because they focus on financial risks, not on financial gains. 

e. Hindsight Bias - This occurs when an individual always claims that he is right. With this  claim, some may mistakenly believe that he can predict an outcome.  

 

 Heuristics - This is also called the Heuristic Technique. In behavioral finance, this is a method  of finding solutions of problems in a rapid way. Using this approach, investors and financial  managers quickly decide without hesitation to immediately come up with a solution.