fil 241 exam dalia questions well answered

fil 241 exam dalia questions well answered1. What is overoptimism (overconfidence)? Excessive hopefulness or confidence in one's ability to complete or do something 2. How common are overoptimism and overconfidence? Very common in tasks or industries that you are familiar with 3. Are smarter people less overoptimistic? Being smarter does not help to avoid overoptimism intellectual abilities and overoptimism are positively correlated. An expert in a field is going to be overoptimistic because he thinks he has more knowledge than he does 4. Can the same person be overly optimistic about some issues and overly pessimistic about others? Yes. The more knowledge they have on a topic the more likely they will be overoptimistic. 5. What is the effect of the past success on overoptimism? 1. Past success increases overoptimism 2. Leads to more people becoming more confident with prior success 6. How can people learn to become less overoptimistic? People can learn to be more precise if they are given feedback about their performance and their performance is associated with rewards and punishments 7. What is the availability heuristic? How is it related to good and bad economics? • We pay more attention to facts that are easy to recall • Good economics (paying attention to all consequences) • Bad economics (paying attention only to the most visible immediate consequences 8. What is the broken window fallacy? How is this related to war? It is a reduction in disposable income due to the spending of income on a good that was not original meant to be intentional, therefore robbing other industries. Kid breaks window and they say he is stimulating economy by giving the glass company and material companies business. Meanwhile the owner cannot buy something new that would stimulate economy. Spending money on war takes away money being spent on other industries. The rebuilding that occurs after war is primarily maintenance costs, meaning that it would be much better off not fighting at all. 9. Why public works do not work to stimulate economy? Govt pays for them and it takes away money from other industries. 10. What is rationalizing? Jumping to conclusions one likes Noticing facts confirming these conclusions Ignoring facts that contradict these conclusions Wishful thinking instead of facing reality 11. Does the presence of behavioral biases imply that people are irrational? No, it means that people cannot process an infinite amount of information. Thus, using shortcuts is rational even if sometimes that leads to wrong decisions. 12. How do the mechanisms like financial markets (or other markets) mitigate the effect of behavioral biases (e.g., overoptimism and rationalizing)? They reduce the impact of our mistakes and helps us to learn/ the need for punishment and rewards 13. What is a typical effect of government interference in financial markets on behavioral biases? Why? Govt tend to bail out underperformers, and increase their participation in the markets. Govts consist of people being overly optimistic probably increase the chances of them getting reelected. 1. Why is ethics important? Ethical norms affect business and financial markets directly and through the legal system. Bad ethics can destroy the economy Rule of Law- we need government Economic freedom- people should be allowed to pursue professions they like and keep rewards they earn 2. Why is it important to rely on principles? We need to use principles because we need to simplify our decision making- we cannot estimate all consequences of our actions 3. How is the ethics of warrior cultures different from the ethics of later cultures? Need to justify robbing and enslaving people Later, we wanted to be productive for ourselves and economy 4. How is Enlightenment period ethics different from the idea that you are your brother's keeper? According to enlightenment ethics, you are yourself responsible for achieving what you want in your life. You can do it yourself or through voluntary interaction with other people. "You are your brother's keeper" means that you are responsible for their well-being. • You cannot use fraud or use other people • Opposite of warrior culture • You can take care of yourself • Don't need to be enslaved if your prdocutinve so someone can tell you what to do 5. What are some of the virtues in this ethics? • Productivity • Integrity • Rationality • Justice • Benevolence (not altruism) should make your life better 6. Why the property right is important? The property one earns. Property rights are essential for economic development. They provide an incentive for people to succeed economically. 7. How can ethics affect economic development? Ethics affect business and financial markets. Enlightenment period was period of enormous economic growth. 1. Explain why markets (e.g., stock market, real estate market) fluctuate even without any government interference The markets fluctuate because people invest in them and transactions take place. Markets are also self-correcting, many factors play a role 2. Explain the recent real estate bubble and crash (without considering government interference - we will do that later). More people buying made real estate prices go up, this made people build more. Interest rates were low so people borrowed more. People over extended themselves 3. Why are too high (too low) prices in a particular industry or market harmful? The price determines how people invest/ borrow. When prices are wrong people make wrong investment decisions 4. Explain how the markets correct themselves. Eventually the market crashes or the bubble crashes. The sooner the better 5. Why do we say that the recent real estate crash was not a problem but a solution? What was the problem? The problem was the bubble and the solution was the crash. Crash is good for the economy because it corrects the markets 6. Give some examples showing how too high prices in real estate caused problems. More houses were being build and wrong investment decisions were made. People with little experience in real estate got in and made bad decisions 7. Why it is better for the overpriced market to crash sooner rather than later? It is like medicine for a sick person, the sooner it happens the sooner things get fixed 1. What is financial market? Physical location or electronics network where financial instruments are traded 2. What are financial institutions (financial intermediaries)? • Commercial banks • Life insurance companies • Finance companies 3. What do financial markets and intermediaries do? Take money from those with excess funds and provide funds to those who can use them. EX: students borrow money from intermediaries to go to school 4. Why do we need financial markets and intermediaries to save or to borrow? It benefits both sides of the transactions, and the economy overall. We take the money and go out and buy things and interest back to these intermediaries making them money to invest in other borrows or securities themselves 5. What are the three ways for capital allocation among firms? Which one historically was more efficient? 1. Through financial markets (capitalism) 2. Through government regulations (statism) 3. Or a mixture of both Hiisorically most economies mixed but lean more to one side 7. Why is capital accumulation important? What happens if we maximize our consumption today? If we maximize our consumption our debt will continue to rise If the growth rate is too low, the economy will not grow at a rate fast enough to support a higher force. If the growth rate is too high, the economy will over expand and ultimately collapse 8. Who tend to save and who tends to borrow? People are net savers Government is net borrowers 9. What is the role of competition (or a threat of it) in the financial system? It increase efficiency. Companies that go BK are destroying wealth, so they are making world poorer. When they're resources are released, other companies are able to thrive. Makes incentives which push us to be best 10. What is direct financing? People or institutions that exchange money and financial claims directly. You are buying exactly what someone is selling, not just a part of it 11. Which institutions facilitate direct financing? Investment banks, and money bank centers, financial intermediaries 12. What is the process of issuing new securities? Origination-preparing the security for sale Underwriting- fixed price underwriting Distribution- marketing and sale to investors or institutions 13. What do brokers and dealers do? Brokers bring two people together for transaction Dealers have the actually security and are trading it 14. What are the disadvantages of direct financing? Very large transactions are made, traded financial claims may not have desired characteristics 15. What is the main function of financial intermediaries? to create value for the customers. Transfer funds to those who need it 16. What are mortgage backed securities? The pooling of mortgages that are backed by securities 17. What is the main goal of financial intermediaries? Why? to keep shareholders happy and maximize wealth 18. What is the main way financial intermediaries make profit? By borrowing at a lower interest rate and lending at higher interest rates 19. What are the problems with the statement "from each according to his ability, to each according to his needs"? Marxism era. Does not allow for the bettering of yourself. If you have the ability to work, you work, therefore you are being punished for work. Slows down motivation and productions 20. What are comparative advantages of financial intermediaries? Economies of scale Obtaining reliable credit information Experience 21. What is adverse selection? Give examples. What makes it worse? People who get loans with no plan to repay the loan are the people who try the hardest to obtain the loan Lenient laws that give the person another chance are what makes this system worse 22. What is moral hazard? Give examples. What makes it worse? Once I buy insurance, I engage in riskier activities. If government insure everybody, everybody engages it riskier activities 23. Which inter mediation services do financial intermediaries provide? • Denomination divisibility • Currency transformation • Maturity flexibility • Credit risk diversification • Liquidity-loans are harder to sell by themselves, once you create a mortgage backed security the loan becomes more liquid. More securities we have, the more everything else will be equal 24. Describe deposit institutions. Give examples of deposit institutions. Where you can deposit and withdraw money from your account Ex: commercial banks, thrift institutions, credit unions 24. Describe deposit institutions. Give examples of deposit institutions. Where you can deposit and withdraw money from your account Ex: commercial banks, thrift institutions, credit unions 26. Describe investment funds. Give examples of investment funds. A supply of capital belonging to numerous investors that is used collectively purchase securities while each investor retains owenership and control of their own shares. Mutual funds, money market mutual funds, it is important to diversify 27. Give examples of other financial intermediaries. Finance companies 28. What is the difference between primary and secondary markets? Primary market is where the security is originated. Profits from the selling of those securities goes directly to the company that issued that security. Secondary market is when the investor who original bought the security is now selling to another investor 29. Why are secondary markets important? Secondary market is important for the company to provide liquidity, makes securities more attractive. Easy to sell quickly without loss of value. In secondary market you can see how value of company is changing 30. What is the difference between organized and over-the-counter markets? Organized security exchange has a central physical location where securities are traded. EX: NYSE, CBOT Over the counter has no physical location 32. What is the difference between domestic and international markets? International- located outside the U.S.