beh finance rough ppt.pptx

7/29/2019 beh finance rough ppt.pptx

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Availability Bias

Availability bias is a human cognitive bias thatcauses us to overestimate probabilities ofevents associated with memorable ordramatic occurrences.

The availability biasis a mental shortcut thatoccurs when people make judgments aboutthe probability of events by how easy it is to

think of examples. The availability biasoperates on the notion that, "if you can thinkof it, it must be important."


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Application of Availability Bias

Media

Business and Economy

Education

Criminal Justice

Human Life


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Overreaction Bias

One consequence of having emotion in the stockmarket is the overreaction toward newinformation. According to market efficiency, new

information should more or less be reflectedinstantly in a security's price.

Reality, however, tends to contradict this theory.Oftentimes, participants in the stock market

predictably overreact to new information,creating a larger-than-appropriate effect on asecurity's price.


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Research Paper 1: Overreaction to

Fearsome Risks

Problem and Thesis

Overreaction to Environmental Risks

(1) Environmental risks are usually imposed unwillingly onexternal parties

(2) We misperceive the risk, as happened after Three MileIsland

(3) A series of conservative assumptions we end up with a

probability estimate that is far above what an expectedvalue calculation would yield.

(4) the emotions stirred by its fearsome aspect lead us toneglect probability values.


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The Demand For and Supply of Law

If probability neglect characterizes individualjudgment under certain circumstances,government and law are likely to be

neglecting probability under those samecircumstances. If people show unusuallystrong reactions to low-probabilitycatastrophes, a democratic government is

likely to act accordingly, either because it isresponding to the public, or because itsofficials suffer the same proclivities.


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Research Paper 2: The Facebook

Investor You Never Want to Become

Facebook is likewise vividly top of mind for manypeople, who use it so frequently and so verypersonally. This meant that Facebook loomed larger ininvestors' minds than it deserved to, given the facts.

Availability bias distorts business investments in thesame way, particularly when corporations seek newgrowth. In deciding where to allocate new-product ornew-business development funds, they all too often

view their core or high-profile markets as the safestbets only because they are familiar


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Continued

The alternative to constraining your decisions

to the familiar (or the famous) is to ground

your investments in a decision-making process

that is deliberate, not reactive

Focus on discovering customers' needs

Pursue a long-term strategy

Don't follow the herd


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beh finance rough ppt.pptx

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