Chapter 22 Behavioral Finance Implications for Financial Management

E(S1) = £.6211[1 + (.055 − .06)]1 = £.6179945
E(S2) = £.6211[1 + (.055 − .06)]2 = £.6149045
E(S3) = £.6211[1 + (.055 − .06)]3 = £.6118300

CF0 = −£130,000($1/£.6211) = −$209,306.07
CF1 = £20,000($1/£.6179945) = $32,362.75
CF2 = £50,000($1/£.6149045) = $81,313.44
CF3 = £90,000($1/£.6118300) = $147,099.68

NPV = −$209,306.07 + $32,362.75/1.14 + $81,313.44/1.142 +
$147,099.68/1.143
NPV = −$19,062
122) D
Profit = 25,000[$148 − S$162($1/S$1.2602)]
Profit = $486,224
123) D
Δ in cost = ¥27,500($1/¥113.25) − ¥27,500($1/¥111.30)
Δ in cost = −$4.25

Student name:
1) Harrison was reflecting on a business decision he made last month, because the decision
had led to a poor outcome. He concluded that an error in his reasoning had caused him to make
the bad call. Which one of the following areas of study best applies to this situation?
1)


A) Corporate ethics
B) Financial statement analysis
C) Managerial finance
D) Debt management
E) Behavioral finance

,Question Details
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible
Difficulty : 1 Basic
Learning Objective : 22-01 Describe how behaviors such as overconfidence, overoptimism, and confirmat
Section : 22.1 Introduction to Behavioral Finance
Topic : Behavioral finance
AACSB : Reflective Thinking
Bloom's : Remember




2) Fahad is a successful wealth manager who consistently generates abnormally high returns
for his clients. He has decided to publish a newsletter in order to share his superior financial
wisdom with others. There is a very real probability that Fahad suffers from:
2)


A) the gambler's fallacy.
B) frame dependence.
C) overconfidence.
D) the representativeness heuristic.
E) sentiment-based risk attitudes.



Question Details
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible
Difficulty : 1 Basic
Learning Objective : 22-01 Describe how behaviors such as overconfidence, overoptimism, and confirmat
Section : 22.2 Biases
Topic : Biases
AACSB : Reflective Thinking
Bloom's : Understand




3) Thomas is convinced that he is skilled at picking winning stocks. Accordingly, he trades
frequently. This behavior is typical of those who have:
3)

, A) confirmation bias.
B) frame dependence.
C) overconfidence.
D) the representativeness heuristic.
E) the break-even effect.



Question Details
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible
Difficulty : 1 Basic
Learning Objective : 22-01 Describe how behaviors such as overconfidence, overoptimism, and confirmat
Section : 22.2 Biases
Topic : Biases
AACSB : Reflective Thinking
Bloom's : Understand




4) Whenever Austin analyzes a proposed project, he assigns a much higher probability of
success to the project than is warranted by the information he has gathered. Austin suffers from:
4)


A) frame dependence.
B) mental accounting.
C) the endowment effect.
D) confirmation bias.
E) overoptimism.



Question Details
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible
Difficulty : 1 Basic
Learning Objective : 22-01 Describe how behaviors such as overconfidence, overoptimism, and confirmat
Section : 22.2 Biases
Topic : Biases
AACSB : Reflective Thinking
Bloom's : Understand

, 5) After making a decision, Rosario seeks information that confirms the decision was a good
decision and ignores conflicting information. This is an example of:
5)


A) overconfidence.
B) overoptimism.
C) the affect heuristic.
D) confirmation bias.
E) the representativeness heuristic.



Question Details
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible
Difficulty : 1 Basic
Learning Objective : 22-01 Describe how behaviors such as overconfidence, overoptimism, and confirmat
Section : 22.2 Biases
Topic : Biases
AACSB : Reflective Thinking
Bloom's : Understand




6) Assume you are a project manager. Which one of the following best illustrates an error
you might make because of confirmation bias?
6)