Chapter 22
Behavioral Finance: Implications for Financial Management
Multiple Choice Questions
1.
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?
2.
Peter has successfully managed the finances of A.D. Leadbetter in a
manner that has yielded abnormally high returns. Due to this success, Peter
has decided to publish a newsletter for financial executives so that he can
share his superior financial wisdom with others. There is a very real
probability that Peter has which one of the following characteristics?
3.
Anytime Ted analyzes a proposed project, he always assigns a much higher
probability of success to the project than is warranted by the information he
has gathered. Ted suffers from which one of the following?
4.
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?
5.
Which one of the following refers to the fact that an individual may reply
differently if a question is asked in a different manner?
6.
General rules used as the basis for decision making are referred to as:
7.
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:
8.
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?
9.
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?
10.
Stewart is a fellow finance student at your school who is addicted to day
trading and thus buys and sells stocks between classes and over his lunch
break. He never has time to really analyze a security so just trades the stock
symbols that other investors appear to be trading. Stewart is which one of
the following?
11.
Which one of the following is an investment risk that investors face in
addition to firm-based risk and market-based risk?
12.
Most people would tend to agree that technology stocks were highly
overvalued in the late 1990’s. This time period is best described as a
technology:
13.
A sudden and severe decline in market prices is best described as a
market:
14.
Which one of the following best illustrates an error which you, as a
manager, might make due to overconfidence?
15.
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?
16.
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?
17.
When weighing a decision, Kate places greater emphasis on opinions that
match her own than she does on opinions offered by others that disagree
with her personal point of view. Kate illustrates which one of the following?
18.
Kaiser Marketing recently conducted a survey on behalf of Health Products.
The primary purpose of the survey was to illustrate to Health Products that
it was relying on results of previous studies that, according to Kaiser, were
unreliable due to the wording of the survey questions. To prove this point,
Kaiser conducted a two-prong survey. In the first prong, the survey
questions were worded such that the answers tended to sound positive. In
the second prong, the survey questions were re-worded such that the
answers tended to convey a negative feeling. Both sets of survey questions
should have resulted in similar results as the information solicited was
essentially identical. However, the survey results varied significantly. This
survey best illustrates which one of the following?
19.
Recently, a neighbor you have known for years won a lottery and received a
$250,000 prize. This neighbor decided to invest all of his winnings in a new
business venture that he knew only had a five percent chance of success.
Previous to this, the neighbor had always been ultra conservative with his
money and had refused to invest in this business venture as recently as last
week. Which one of the following behaviors most applies to your neighbor’s
decision to invest in this business venture now?
20.
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?