FIN 401 Exam 3 Definitions, Terms, and Concepts (Nixon) | updated

FIN 401 Exam 3 Definitions, Terms, and Concepts (Nixon) | updated Conventional Finance Theory - Assumes people are: 1) Rational 2) Seek to maximize their own welfare Behaviorists - Believe that irrational forces impact behavior Information Processing (Errors) - 1) Forecasting Errors 2) Overconfidence 3) Conservatism 4) Sample Size Neglect and Representativeness Forecasting Error - Too much weight is placed on recent experiences ex) Recently high earnings, if given too much weight, results in low P/E ratio Overconfidence - We overestimate our ability ex) 90% of drivers are better than average Only 20% of mutual funds are indexed assets (people think they can beat the market) Men are more likely to be active traders (studies suggest men are more overconfident)