Chapter 12 Behavioral Finance and Technical Analysis

Multiple Choice Questions

1. Conventional theories presume that investors ____________ and behavioral finance

presumes that they ____________. A) are irrational; are irrational B) are rational; may not be rational C) are rational; are rational D) may not be rational; may not be rational E) may not be rational; are rational

Answer: B Difficulty: Easy

2. The premise of behavioral finance is that A) conventional financial theory ignores how real people make decisions and that

people make a difference.

B) conventional financial theory considers how emotional people make decisions but

the market is driven by rational utility maximizing investors.

C) conventional financial theory should ignore how the average person makes

decisions because the market is driven by investors that are much more sophisticated than the average person.

D) B and C E) none of the above

Answer: A Difficulty: Easy

3. Some economists believe that the anomalies literature is consistent with investors’

____________ and ____________. A) ability to always process information correctly and therefore they infer correct

probability distributions about future rates of return; given a probability distribution of returns, they always make consistent and optimal decisions

B) inability to always process information correctly and therefore they infer incorrect

probability distributions about future rates of return; given a probability distribution of returns, they always make consistent and optimal decisions

C) ability to always process information correctly and therefore they infer correct

probability distributions about future rates of return; given a probability distribution of returns, they often make inconsistent or suboptimal decisions

D) inability to always process information correctly and therefore they infer incorrect

probability distributions about future rates of return; given a probability distribution of returns, they often make inconsistent or suboptimal decisions

E) none of the above

Answer: D Difficulty: Moderate

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4. Information processing errors consist of

I) forecasting errors II) overconfidence III) conservatism IV) framing A) B) C) D) E)

I and II I and III III and IV IV only I, II and III

Answer: E Difficulty: Moderate

5. Forecasting errors are potentially important because

A) research suggests that people underweight recent information. B) research suggests that people overweight recent information.

C) research suggests that people correctly weight recent information. D) either A or B depending on whether the information was good or bad. E) none of the above. Answer: B Difficulty: Moderate

6. DeBondt and Thaler believe that high P/E result from investors A) earnings expectations that are too extreme.

B) earnings expectations that are not extreme enough. C) stock price expectations that are too extreme.

D) stock price expectations that are not extreme enough. E) none of the above.

Answer: A Difficulty: Moderate

7. If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors. A) framing

B) selection bias C) overconfidence D) conservatism E) forecasting Answer: E Difficulty: Moderate

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8. Single men trade far more often than women. This is due to greater ________ among men.

A) framing

B) regret avoidance C) overconfidence D) conservatism E) none of the above Answer: C Difficulty: Moderate

9. ____________ may be responsible for the prevalence of active versus passive investments management. A) Forecasting errors B) Overconfidence C) Mental accounting D) Conservatism E) Regret avoidance

Answer: B Difficulty: Moderate

10. Barber and Odean (2000) ranked portfolios by turnover and report that the difference in

return between the highest and lowest turnover portfolios is 7% per year. They attribute this to A) overconfidence B) framing C) regret avoidance D) sample neglect E) all of the above

Answer: A Difficulty: Moderate

11. ________ bias means that investors are too slow in updating their beliefs in response to

evidence. A) framing B) regret avoidance C) overconfidence D) conservatism E) none of the above

Answer: D Difficulty: Moderate

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