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Exam 22: Behavioral Finance: Implications for Financial Management

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Question 21

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Provide an example of a managerial decision that illustrates each one of the following behaviors: Behavior: Overconfidence Example: Behavior: Affect heuristic Example: Behavior: Loss aversion Example:

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Question 22

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Up until three years ago,A.C.Dime opened an average of ten new retail stores a year.One of those stores had to be closed within two years due to poor sales.This 90 percent success ratio was fairly steady for over 30 years.Starting three years ago,the firm has opened 40 new stores and every one had significant profits within 6 months.Management believes their recent success is not just a random event and that all future stores will be profitable.Thus,the managers have decided to open a minimum of 15 new stores each year.The managers are suffering from:

A) arbitrage limitations.
B) anchoring and adjustment.
C) aversion to ambiguity.
D) the clustering illusion.
E) myopic aversion.

F) A) and E)
G) A) and B)

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Question 23

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You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts that he never would have opened the new store in Centre City.Which one of the following caused your boss to make a bad decision?

Steve purchased a stock last year for $34 a share.The stock increased in value to $36 a share before declining to its current value of $30.Steve has decided to sell the stock,but only if he can receive $34 a share or better.Steve is suffering most from which one of the following behavioral conditions?

Which one of the following is an investment risk that investors face in addition to firm-based risk and market-based risk?

Which one of the following best illustrates an error which you,as a manager,might make due to overconfidence?

Which one of the following refers to the fact that an individual may reply differently if a question is asked in a different manner?

The tendency for a decision maker to search for confirmation that a recent decision he or she made was a good decision represents which one of the following characteristics?

Mike is a stock broker and financial planner.Phil is one of Mike's clients.Phil prefers to meet with Mike just once a year to review his investment portfolio.At their most recent meeting,Phil stated he believes the stock market is going to decline in value over the next six months.Thus,Phil instructed Mike to sell every stock he owns that is currently worth more than what he paid to purchase it.Phil also instructed Mike to retain any stock that would create a capital loss if sold.Phil is displaying the behavior known as:

Amy is the chief financial officer of a retail toy store.Recently,she decided that the firm should expand its operations and open two additional stores.Within a very brief period,it was obvious that Amy had made a very bad decision in opening those stores,given that the economy is in the middle of a severe recession.In reflecting back on her decision,Amy realizes that she made a bad decision due to a reasoning error.Which one of the following areas of study best applies to this situation?

Marzella Corp.is analyzing a project that involves expanding the firm into a new product line.The project includes the construction of a new manufacturing facility and the creation of a new distribution system.The project's financial projections will tend to have which one of the following characteristics if the person compiling those projections suffers from overoptimism?

Old Country Productions requires skilled furniture finishers to put the final touches on all of the furniture it produces.The firm hired two individuals last year who had been students in Mr.Tedwell's wood shop class in high school.Both of these employees have demonstrated exceptional skills and have already been promoted to senior finishing positions.The firm currently has an opening for one additional finisher.Tom,the head of the finishing section,has stipulated that he only wants to interview candidates who have completed Mr.Tedwell's course.Tom's behavior is typical of someone who has which one of the following characteristic behaviours?

Which one of the following statements related to market crashes is correct?

In an efficient market,it is believed by some individuals that the actions of traders who constantly buy and sell on any perceived market mispricings will in effect cause market prices to correctly reflect asset values.A person who believes that the actions of these traders will not result in correctly valued prices are most apt to believe in which one of the following?

Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.

Ramon opened a combination laundry and dry cleaning establishment three years ago.Due to his excellent service and reasonable prices,his business has grown and is doing quite well financially.He has considered expanding this business by opening another location but keeps putting off that decision for fear that the second location will not be a success.Ramon is currently displaying which one of the following behavior characteristics?

Amy has been investing in stocks so she can accumulate sufficient money to purchase her own home.These savings are currently valued at $82,500.As recently as last month,her savings were worth in excess of $110,000.Today,Amy found the perfect house.She knows she can withdraw her savings to pay on this house and borrow the remaining balance from her father at zero percent interest.However,Amy is refusing now to buy any house until her savings increase in value back to their $110,000 previous valuation.Amy is displaying which one of the following behaviors?

Bill feels that he possesses a good dose of "street smarts".Thus,he makes his business decisions based on how a project feels to him rather than taking the time to financially analyze a project.This type of behavior is referred to as:

Assume you are an overconfident manager.You are most apt to do which one of the following more so than you would if you were not overconfident?

Historical returns support which one of the following statements?