Bob Winston and his neighbor, both
U.S. residents, are meeting at a local restaurant.
During lunch, they discuss
investing and Winston, age 45, makes the following
statements:
Select the behavioral finance
concept best exhibited in each of Donaldson’s three statements.
Note: No behavioral finance concept
can be used more than once.
i.
Naïve
diversification
ii.
Overconfidence
iii.
Representativeness
iv.
Regret
avoidance
v.
Self-control
Explain how the behavioral finance
concept you selected affects Donaldson’s investment decision making.
a. “My father was a buy-and-hold investor
but I am an active trader. To keep trading costs low, I use an online brokerage
firm. I have done well investing in technology companies because I know the
industry.”
b. “I am holding a large position in Omega
Corporation with a large unrealized loss. Omega’s stock price declined last
year when reported sales and earnings failed to meet analyst expectations. I
took advantage of the decline to increase my position. Omega sales growth has
continued to slow over the last year, but I believe the stock is still a good
investment.”
c. “I read a newspaper article reporting
that commercial property values in the city have increased 14 percent annually
since 2000. According to the article, the average commercial property in the
city sold for $1.5 million last year. This makes me very happy because I just
purchased a piece of commercial property last month. There is no doubt that it
will be a good investment.”
