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Chapter 22
BEHAVIORAL FINANCE: IMPLICATIONS FOR
FINANCIAL MANAGEMENT
CHAPTER WEB SITES
Section
Web Address
22.5
www.zakon.org/robert/internet/timeline
CHAPTER ORGANIZATION
22.1 Introduction to Behavioral Finance
22.2 Biases Overconfidence
22.3 Framing Effects
22.4 Heuristics
22.4
www.behavioralfinance.net
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ANNOTATED CHAPTER OUTLINE
Lecture Tip: In the chapter opener, the issue of market bubbles is presented,
providing the specific example of the internet bubble in the late 1990s. Other
22.1. Introduction to Behavioral Finance
Poor outcomes may result from one of two issues:
-you have made a good decision, but something happens that was an
extremely unlikely event (i.e., you were unlucky)
-you simply made a bad decision (cognitive error)
Lecture Tip: Sometimes events occur that are beyond our control. We have
22.2. Biases
A. Overconfidence
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Lecture Tip: Overconfidence is tied to self-attribution bias, which
B. Overoptimism
22.3. Framing Effects
How a question is framed may determine the most likely response
that is given.
Ethics Note: Ask students to consider a political election with two
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Lecture Tip: Historically, employees who were offered a company-
sponsored retirement plan (such as a 401(k)) were required to opt
-focusing on gains and losses, rather than overall wealth, is a type
of narrow framing that leads to loss aversion
B. House Money
-gamblers are more likely to take big risks with money they have
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22.4. Heuristics
-rules of thumb (or mental shortcuts) used to make decisions
A. The Affect Heuristic
C. Representativeness and Randomness
D. The Gambler’s Fallacy
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Other related biases include:
Lecture Tip: In 2008, there was a great amount of flooding
across the Midwest, with many areas experiencing “500–
22.5. Behavioral Finance and Market Efficiency
If many traders behave in a way that is economically irrational (i.e.,
exhibit behavioral bias), then are markets really efficient?
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B. Bubbles and Crashes
Bubble – market prices exceed the level that normal, rational
22.6. Market Efficiency and the Performance of Professional Money Managers
Chapter 22 – Behavioral Finance: Implications for Financial Management
22.7. Summary and Conclusions