Lecture notes
Revision lecture
- Module
- Behavioural Finance
- Institution
- Loughborough University (LU)
Course summary and revision
[Show more]
Seller
Follow
Content preview
Behavioural Finance Topic 11 – Revision Session16 May 2019 Lecture
June 2018 Exam
1)
(i)
• Value (appreciated): 900’000 x 1.4 = 1’260’000
• Less mortgage: (500’000)
• Wealth 760’000
• Less rebuild cost (610’000)
• Wealth if it burns 150’000
U (w2) > U (w1).
• U (w1) = 0.999 x U (760’000) + 0.001 x U (150’000) = 0.999 x 871.780 + 0.001 x 387.298 =
870.908 + 0.387 = 871.295.
• U (w2) (if they buy insurance) = (760’000 – premium)1/2 🡪 760’000 – p = 871.2952 = 759.155 🡪
p= $845.
(ii)
• Expected payout = 0.001 x $610’000 = $610
• Risk premium = $235.
• The risk premium represents the amount above the expected return that somebody is willing
to pay to get rid of the risk of a house burning down in the even that it is not insured (one
sentence answer, the rest all maths no text)
Some ideas
, • Endowment effect
• Framing 50/50 gamble framed on gains or losses
• Investment appraisal, sunk costs
• Buy insurance + buy lottery tickets
• Life insurance vs annuities
• Organ donation
• NY taxi drivers
• Teacher incentives
• Cinema tickets (mental accounting)
We need to work out two things: the pain of buying the ticket and the potential joy that comes from
winning the lottery.
2)
(i) using probabilities (0.00001)
• V from buying ticket = -2 x 100.75 = -11.25.
• V from having ticket = 0.00001 x 7500.75 = 0.00001 x 25’486 = 0.255
▪ -11.25 + 0.255 = -11. V is negative; hence should not buy.
(ii) using decision weights (0.0060)
• V from buying ticket = -2 x 100.75 = -11.25.
• V from having ticket = 0.0060 x 25’486 = 15.29
▪ -11.25 + 15.29 = +4.04. V is positive; hence we expect the person to buy the ticket.
(iii) using probability values
• -2 x p0.75 = 0.255
• Hence, p = (0.255/2)1/0.75 = $0.0642, the amount they should be willing to pay
(iv) using decision weight values
• -2 x p0.75 = 15.29
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller alfonsoyageyges. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £7.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
66579 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now