Finance API 141: Behavioral Finance: Implications for Financial Management

Finance API 141: Behavioral Finance: Implications for Financial Management Multiple Choice Questions 1. Amy isthe 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? A. corporate ethics B. financial statement analysis C. managerial finance D. debt management E. behavioral finance 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 executivesso 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? A. gambler'sfallacy B. frame dependence C. overconfidence D. representativeness heuristic E. sentiment-based risk attitudes 3. Anytime Ted analyzes a proposed project, he always assigns a much higher probability ofsuccessto the project than is warranted by the information he has gathered. Ted suffers from which one of the following? A. frame dependence B. overconfidence C. gambler'sfallacy D. confirmation bias E. overoptimism 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? A. overconfidence B. overoptimism C. affect heuristic D. confirmation bias E. representativeness heuristic 5. Which one of the following refersto the fact that an individual may reply differently if a question is asked in a different manner? A. loss aversion B. gambler's fallacy C. frame dependence D. overconfidenc e E. format reference 6. General rules used as the basis for decision making are referred to as: A. a loss aversion technique. B. heuristics . C. selfattribution. D. narrow framing. E. confirmation bias. 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: A. overconfidence . B. endowment effect. C. money illusion. D. affect heuristic. E. sentiment-based risk. 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 wantsto 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? A. endowment effect B. framing effect C. representativeness heuristic D. narrow framing E. affect heuristic 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? A. gambler's fallacy B. limits to arbitrage C. availability bias D. false consensus E. clustering illusion 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 symbolsthat other investors appear to be trading. Stewart is which one of the following? A. noise trader B. arbitrageu r C. crashe r D. regret averter E. myopic loss averter