WORKSHOP 9 QUESTIONS

1. We tend to place a greater value on avoiding losses (over potential equivalent gains), due to the associated negative emotional impact. The priority of avoiding losses also holds true for investors.

a) Give an example, of loss aversion, that illustrates why investors need to avoid the sunk cost fallacy.

b) what is a stop loss?

2. Investors are subject to fear, for example that others know more or have more information. As a consequence, investors feel a strong impulse to do what others are doing.

Which of the following descriptions of investment behaviour are NOT examples or descriptions of cognitive or information processing bias?

a) I carefully analyse stock or bond prices and identify mis-aligned prices (arbitrage opportunities)

b) I place too much worth on judgments derived from small samples of data or single sources.

c) Professional investors are more skilled in pickingwinning stock.

3. Entrepreneurs frequently appear to have an overstated sense of their own abilities and may jump into new business ventures with inadequate regard for the competition and the size of the market.

Which of the following factors illustrate how overconfidence' explains why so many business start-ups fail in the first few years?

a) they make inadequate plans for early years capital adequacy (liquid funds)

b) underestimating the degree of market competition (over-estimate early sales)

c) too many entrepreneurs are male

4. Confirmation bias refers to the tendency to see data the way we want to see it.

Which of the following is NOT true:

a) We are most likely to believe what we think is already true.

b) People see what they want to, usually.

c) We tend to accept evidence that goes against what we think is true and reject evidence that supports it.

5. It has long been known that we tend to over-insure small risks and under-protect ourselves against genuine, larger ones.

Which of the following statements also involve other cognitive or reasoning errors?

a) UK adults are twice as likely to insure their pets as they are to insure themselves.

b) humans dont find it easy to think clearly about risk.

c) spread betting is not gambling I know what I am doing

6. Many small-risk insurance offers represent absurdly poor value ... for example much travel insurance, mobile phone contracts or car-hire excess insurance

Which of the following is NOT true:

a) third-party excess insurance costs a fraction of these prices.

b) we could refuse them all and instead self-insure

c) self-assurance means we should only buy cover for ourselves, not others

7. We are constantly being shaped and manipulated in our everyday, online life

Nudge units now abound in the public sphere and online marketing circles are any of the points below NOTnudges?

a) using an opt-in box for organ donation (in a Drivers Licence Application)

b) placing water bottles instead of soft drink cans near the register in the cafeteria

c) a sign, placed near the door of a room in an office building, which reminds people that they should turn off the light when they leave

d) feedback to households about their and neighbours electricity usage.

8. Ambiguity, or uncertainty, aversion, is the tendency to favour the known over the unknown, including known risks over unknown risks.

For example, when choosing between two bets, we are more likely to choose the bet for which we know the odds, even if the odds are poor, than the one for which we dont know the odds.

Which of the following observations describe ambiguity aversion (or solutions to it)?

n.b. there may be more than one correct response

a) we should study betting odds more carefully

b) avoiding participating in the stock market, which has unknown risks

c) avoiding certain medical treatments when the risks are less known

Additional References

Easley, D., & OHara, M. (2009). Ambiguity and nonparticipation: the role of regulation. The Review of Financial Studies, 22(5), 1817-1843.

Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. The Quarterly Journal of Economics, 75(4), 643-669.

Berger, L., Bleichrodt, H., & Eeckhoudt, L. (2013). Treatment decisions under ambiguity. Journal of Health Economics, 32, 559-569.

Nudge. Richard Thaler and Cass Sunstein (2014)