FNCE 239 Lecture Notes - Lecture 12: Loss Aversion, Risk Aversion, Mental Accounting

• School: UPenn
• Department: Finance
• Course: FNCE 239
• Professor: N I K O L A I R O U S S A N O V

Document Summary

3/3/16: lecture 12 notes: average investor behavior: aitudes to risk, prospect theory, etc. You"re more risk seeking when you"re in the domain of losses. Cogniive dissonance- you make decisions as if your iniial decision were right because it"s hard o admit that you were wrong. When a new manager comes in and replaces an old one, the disposiion efect reverses. He"ll sell the losing stocks of the old manager"s and realize gains. This is opposite of what the original manager would do. You want to use the diversiicaion efect in porfolios to minimize risks. The low correlaion between these tocks will help decrease the losses. o. You can calculate the gains: what you really care about is the kink. Narrow framing says you have to be very careful in how you structure an experiment because people will perceive mental account in a very diferent way than how they should raionally.