COMMERCE 3FA3 Chapter 26: Chapter 26
13 Apr 2018
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Document Summary
Behavioural nance: the area of nance dealing with the implications of reasoning errors on nancial decisions. Overcon dence: the belief that your abilities are better than they really are. Overcon dence by investors would cause them to overestimate their ability to pick the best stocks, leading to excessive trading. Overoptimism leads to overestimating the likelihood of a good outcome and underestimating the likelihood of a bad outcome. Optimism is usually thought of as a good thing: excessive optimism leads to bad decisions. In a capital budgeting context, overly optimistic analysts will consistently overestimate cash ows and underestimate the probability of failure. Optimism and depression are linked to seasonal cycles measured by the number of hours of cycles. Con rmation bias: searching for (and giving more weight to) information and opinion that con rms what you believe rather than information and opinion to the contrary.
