Question 1

Ramon opened a combination laundry and dry cleaning establishment three years ago.Due to his excellent service and reasonable prices,his business has grown and is doing quite well financially.He has considered expanding this business by opening another location but keeps putting off that decision for fear that the second location will not be a success.Ramon is currently displaying which one of the following behavior characteristics?

Accepted Answer

A)  self-attribution bias
B)  overconfidence
C)  regret aversion
D)  house money effect
E)  frame dependence C

Question 2

You don't particularly like to shop so only go to the mall once a month.To help make the trek more enjoyable,you always have lunch at the restaurant located inside the mall.Since you are such a creature of habit,you always order the same meal.You've noticed that the price of that meal has increased every time you have been there over the past six months.Thus,you expect the meal to increase in price next month.This is an example of which one of the following?

Accepted Answer

A)  recency bias
B)  anchoring and adjustment
C)  frame dependence
D)  aversion to ambiguity
E)  clustering illusion A

Question 3

You are employed as a commission-based sales clerk for a cosmetics retail store.You know that on average,exactly 50 percent of the customers that enter your store will make at least one purchase.Thus far this morning,you have waited on eight customers without making a single sale.You are convinced that the next customer you wait on will buy something.This belief is known as:

Accepted Answer

A)  aversion to ambiguity.
B)  the law of small numbers.
C)  anchoring and adjusting.
D)  gambler's fallacy.
E)  false consensus. D

Question 4

Which one of the following refers to the fact that an individual may reply differently if a question is asked in a different manner?

Accepted Answer

A)  loss aversion
B)  gambler's fallacy
C)  frame dependence
D)  overconfidence
E)  format reference

Question 5

Provide an example of a managerial decision that illustrates each one of the following behaviors:
Behavior:
 Overconfidence
Example:
Behavior:
 Affect heuristic
Example:
Behavior:
 Loss aversion
Example:

Accepted Answer

The answer of Provide an example of a managerial decision...

Question 6

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 symbols that other investors appear to be trading.Stewart is which one of the following?

Accepted Answer

A)  noise trader
B)  arbitrageur
C)  crasher
D)  regret averter
E)  myopic loss averter

Question 7

Which of the following have been offered as factors contributing to the market crash of 1987?
I.requirement for only a 10 percent cash payment to purchase a stock
II.program trading
III.irrational investors
IV.preceeding bear market

Accepted Answer

A)  I and III only
B)  I and IV only
C)  II and III only
D)  I, II, and III only
E)  I, II, and IV only

Question 8

When weighing a decision,Kate places greater emphasis on opinions that match her own than she does on opinions offered by others that disagree with her personal point of view.Kate illustrates which one of the following?

Accepted Answer

A)  frame dependence
B)  overconfidence
C)  gambler's fallacy
D)  confirmation bias
E)  overoptimism

Question 9

Amy is the 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?

Accepted Answer

A)  corporate ethics
B)  financial statement analysis
C)  managerial finance
D)  debt management
E)  behavioral finance

Question 10

Kaiser Marketing recently conducted a survey on behalf of Health Products.The primary purpose of the survey was to illustrate to Health Products that it was relying on results of previous studies that,according to Kaiser,were unreliable due to the wording of the survey questions.To prove this point,Kaiser conducted a two-prong survey.In the first prong,the survey questions were worded such that the answers tended to sound positive.In the second prong,the survey questions were re-worded such that the answers tended to convey a negative feeling.Both sets of survey questions should have resulted in similar results as the information solicited was essentially identical.However,the survey results varied significantly.This survey best illustrates which one of the following?

Accepted Answer

A)  mental accounting
B)  overconfidence
C)  self attribution bias
D)  confirmation bias
E)  frame dependence

Question 11

Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.

Accepted Answer

The answer of Explain why a low-priced,low trading volume stock...

Question 12

Which one of the following is an investment risk that investors face in addition to firm-based risk and market-based risk?

Accepted Answer

A)  management-related risk
B)  inflation risk
C)  supply chain risk
D)  interest rate risk
E)  sentiment-based risk

Question 13

Roger's Meat Market is a chain of retail stores that limits its sales to fresh-cut meats.The stores have been very profitable in northern cities.However,when two stores were opened in the south,both lost money and had to be closed.Roger,the owner,has now concluded that no southern-based store should be opened as it would not be profitable.Which one of the following applies to Roger?

Accepted Answer

A)  confirmation bias
B)  endowment effect
C)  money illusion
D)  affect heuristic
E)  representativeness heuristic

Question 14

Recently,a neighbor you have known for years won a lottery and received a $250,000 prize.This neighbor decided to invest all of his winnings in a new business venture that he knew only had a five percent chance of success.Previous to this,the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week.Which one of the following behaviors most applies to your neighbor's decision to invest in this business venture now?

Accepted Answer

A)  overoptimisim
B)  affect heuristic
C)  loss aversion
D)  house money
E)  get-evenitis

Question 15

Which one of the following statements is true?

Accepted Answer

A)  Market crashes tend to be accompanied by low market volume.
B)  The Asian market crash was followed by a quick recovery.
C)  The market crash of 1929 and the crash of 1987 are very similar in both the percentage decline in market value and in the ensuing market recovery.
D)  Market crashes tend to follow market bubbles.
E)  Market bubbles and crashes prove that financial markets are inefficient.

Question 16

Kate is attempting to sell her house for $260,000.Fred lives across the street in an identical house.Fred recently stated to his wife that Kate's house is probably worth only $250,000 but that once she sells her house,he would like to put their house on the market at $285,000 and then move into a condominium.Which one of the following behaviors applies to Fred?

Accepted Answer

A)  myopic loss aversion
B)  house money effect
C)  money illusion
D)  self-attribution bias
E)  endowment effect

Question 17

Anytime Ted analyzes a proposed project,he always assigns a much higher probability of success to the project than is warranted by the information he has gathered.Ted suffers from which one of the following?

Accepted Answer

A)  frame dependence
B)  overconfidence
C)  gambler's fallacy
D)  confirmation bias
E)  overoptimism

Question 18

Historical returns support which one of the following statements?

Accepted Answer

A)  Financial markets are highly inefficient as suggested by behavioral finance.
B)  Professional money managers tend to outperform the Vanguard 500 index fund about 55 percent of the time on average.
C)  The longer the time span, the more apt a professional money manager is to outperform an index fund, such as the S&P 500.
D)  Historical data supports the statement that arbitrage is unlimited and results in a totally efficient market.
E)  The financial markets appear to be efficient because, on average, they outperform professional money managers.

Question 19

A sudden and severe decline in market prices is best described as a market:

Accepted Answer

A)  crash.
B)  revolver.
C)  bubble.
D)  limit.
E)  mispricing.

Question 20

Mike is a stock broker and financial planner.Phil is one of Mike's clients.Phil prefers to meet with Mike just once a year to review his investment portfolio.At their most recent meeting,Phil stated he believes the stock market is going to decline in value over the next six months.Thus,Phil instructed Mike to sell every stock he owns that is currently worth more than what he paid to purchase it.Phil also instructed Mike to retain any stock that would create a capital loss if sold.Phil is displaying the behavior known as:

Accepted Answer

A)  overconfidence.
B)  arbitrage theory.
C)  the disposition effect.
D)  the house money effect.
E)  a confirmation bias.

Exam 22: Behavioral Finance: Implications for Financial Management