Behavioral Finance

Correct Answer: The investor's decision is likely influenced by the extrapolation bias, where they assume that past trends will continue into the future, leading to an overestimation of the stock's potential performance.

The investor's decision is most likely influenced by the extrapolation bias. This behavioral finance concept refers to the tendency of individuals to assume that past trends will continue into the future, leading to an overestimation of the stock's potential performance. In this case, the investor has observed the stock price steadily increasing over several months, despite the company's fundamentals remaining relatively unchanged. By purchasing the stock based on the belief that the price will continue to rise, the investor is falling prey to the extrapolation bias. The disposition effect is not the correct answer, as it relates to the reluctance of investors to sell stocks at a loss, even if the company's fundamentals have deteriorated. In this scenario, there is no mention of the investor being reluctant to sell the stock at a loss. Similarly, the familiarity bias is not applicable here, as it refers to the preference of investors to invest in stocks they are familiar with, regardless of the company's financial performance or potential risks. The question does not provide information about the investor's familiarity with the stock or company.

Correct Answer: Investors feel the pain of a loss more acutely than the pleasure of an equivalent gain, leading to risk-averse behavior.

The correct answer is that investors feel the pain of a loss more acutely than the pleasure of an equivalent gain, leading to risk-averse behavior. This accurately describes the concept of loss aversion in behavioral finance. Loss aversion suggests that investors are more sensitive to losses than to gains of the same magnitude. For example, the emotional impact of losing $1,000 is typically greater than the positive feeling of gaining $1,000. As a result, investors tend to exhibit risk-averse behavior to avoid potential losses, even if it means forgoing potential gains. The other two options, while related to behavioral biases, do not directly define loss aversion: - The tendency to sell winning investments prematurely and hold onto losing investments is known as the disposition effect, which is a separate behavioral bias. - Placing greater emphasis on recent events or experiences when making investment decisions is known as recency bias, which is another distinct behavioral bias.

Correct Answer: The tendency for investors to attribute successful outcomes to their own skill and poor outcomes to external factors.

The self-serving bias in behavioral finance refers to the tendency for investors to attribute successful outcomes to their own skill and knowledge, while blaming poor outcomes on external factors beyond their control. Answer 255648 describes the concept of short-term thinking or myopic loss aversion, which is a different behavioral bias where investors focus too much on short-term market movements, leading to suboptimal long-term investment decisions. Answer 255649 describes confirmation bias, which is the tendency to seek out information that confirms pre-existing beliefs while ignoring contradictory evidence. While this is also a behavioral bias, it is not the same as the self-serving bias. Therefore, the answer that best describes the self-serving bias is 255647, as it correctly captures the essence of investors taking credit for successes and deflecting blame for failures.