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BF W4-W5: The Behaviour Biases in Decision Making - Coggle Diagram
BF W4-W5: The Behaviour Biases in Decision Making
Prospect theory
Behavioral bias (BB1):
Reference point
Factors affect reference point
past record
past low/high cost/price
expectation
peers
u happy because u receive bonus, but then less happy when realize other colleagues also receive the same, or even more money
ppl make decisions based on reference point (compare with other info, not absolute value)
BB2: Risk attitudes
Traditional finance:
investors are risk averse
BF:
risk attitudes change based on reference point
ex:
if u earn money -> risk averse.
if u lose money -> risk seeking
in domain of gain/loss, u have different risk attitudes
BB3: Probabiliities distortion
our decision weight is different from the objective probability
ex:
"I saw someone win lottery on TV so I think I could also win". However % u win is quite low (lower than being hit by lightning 2 times)
overweight small probability.
underweight moderate/big probability
Challenges
BB5: Metal accounting
Challenge 2 to prospect theory
explains how we tend to assign subjective value to our money
although
money has consistent, objective value
we spend different money depend on
how we earned the money
how we intend to use it
how it makes us feel
BB6: Anchoring bias
comes from priming effect
when an individual's exposure to a certain stimulus influences his or her response to a subsequent stimulus, without any awareness of the connection.
rely too heavily on the first piece of information we are given about a topic.
ex: The group given the descending sequence was working with
larger numbers to start with
, so their partial calculations brought them to a
larger starting point
,
which they became anchored to
BB7: Self control bias
reason
evolution: mismatch between ancient and modern society
biological: dopamine
focus only on short-term pleasure instead of long-term
solution:
manipulate dopamine will concur this bias => uncertainty in results could increase dopamine before working
BB4: Framing
the way an option is framed can influence our certainty that it will bring either gain or loss
we prefer a sure gain and a probable loss
how you present the selections could affect final selection
Challenge 1 to prospect theory
intro
Theory of behavioral economics and behavioral finance developed by Daniel Kahneman and Amos Tvesky in 1979
how ppl make decision
Traditional finance:
2 views
ppl wanna maximize utility
Challenge:
Alias Paradox
ppl prefer certainty over risky outcome
ppl wanna maximize wealth
Challenge:
St Petersburg Paradox
relation between info cognition and decision making
BUT
correct info cog, could still wrong decision
DUE TO
behavioral bias in decision making
wrong info cog -> wrong decision making
decision making compares >2 subjects
info cog is understanding 1 subject
info cog is the foundation of decision making
what's your position when making decision in capital market
stand in others' point of view