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Commerce and BusinessbackBusinessbackCorporate Finance/Financial ManagementbackFundamentals of Corporate FinancebackPractice Set 2491back

Behavioral Finance: Implications For Financial Management

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Question 1
Free
Multiple Choice

Amy is the chief financial officer of a retail toy store.Recently,she decided that the firm should expand its operations and open two additional stores.Within a very brief period,it was obvious that Amy had made a very bad decision in opening those stores,given that the economy is in the middle of a severe recession.In reflecting back on her decision,Amy realizes that she made a bad decision due to a reasoning error.Which one of the following areas of study best applies to this situation?

Choose correct answer/s
A

corporate ethics

B

financial statement analysis

C

managerial finance

D

debt management

E

behavioral finance

Check answer
Question 2
Free
Multiple Choice

Peter has successfully managed the finances of A.D.Leadbetter in a manner that has yielded abnormally high returns.Due to this success,Peter has decided to publish a newsletter for financial executives so that he can share his superior financial wisdom with others.There is a very real probability that Peter has which one of the following characteristics?

Choose correct answer/s
A

gambler's fallacy

B

frame dependence

C

overconfidence

D

representativeness heuristic

E

sentiment-based risk attitudes

Check answer
Question 3
Free
Multiple Choice

Anytime Ted analyzes a proposed project,he always assigns a much higher probability of success to the project than is warranted by the information he has gathered.Ted suffers from which one of the following?

Choose correct answer/s
A

frame dependence

B

overconfidence

C

gambler's fallacy

D

confirmation bias

E

overoptimism

Check answer
Question 4
Free
Multiple Choice

The tendency for a decision maker to search for confirmation that a recent decision he or she made was a good decision represents which one of the following characteristics?

Choose correct answer/s
A

overconfidence

B

overoptimism

C

affect heuristic

D

confirmation bias

E

representativeness heuristic

Check answer
Question 5
Free
Multiple Choice

Which one of the following refers to the fact that an individual may reply differently if a question is asked in a different manner?

Choose correct answer/s
A

loss aversion

B

gambler's fallacy

C

frame dependence

D

overconfidence

E

format reference

Check answer
Question 6
Multiple Choice

General rules used as the basis for decision making are referred to as:

Choose correct answer/s
A
a loss aversion technique.
B
heuristics.
C
self-attribution.
D
narrow framing.
E
confirmation bias.
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Question 7
Multiple Choice

Bill feels that he possesses a good dose of "street smarts".Thus,he makes his business decisions based on how a project feels to him rather than taking the time to financially analyze a project.This type of behavior is referred to as:

Choose correct answer/s
A
overconfidence.
B
endowment effect.
C
money illusion.
D
affect heuristic.
E
sentiment-based risk.
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Question 8
Multiple Choice

Old Country Productions requires skilled furniture finishers to put the final touches on all of the furniture it produces.The firm hired two individuals last year who had been students in Mr.Tedwell's wood shop class in high school.Both of these employees have demonstrated exceptional skills and have already been promoted to senior finishing positions.The firm currently has an opening for one additional finisher.Tom,the head of the finishing section,has stipulated that he only wants to interview candidates who have completed Mr.Tedwell's course.Tom's behavior is typical of someone who has which one of the following characteristic behaviours?

Choose correct answer/s
A
endowment effect
B
framing effect
C
representativeness heuristic
D
narrow framing
E
affect heuristic
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Question 9
Multiple Choice

In an efficient market,it is believed by some individuals that the actions of traders who constantly buy and sell on any perceived market mispricings will in effect cause market prices to correctly reflect asset values.A person who believes that the actions of these traders will not result in correctly valued prices are most apt to believe in which one of the following?

Choose correct answer/s
A
gambler's fallacy
B
limits to arbitrage
C
availability bias
D
false consensus
E
clustering illusion
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Question 10
Multiple Choice

Stewart is a fellow finance student at your school who is addicted to day trading and thus buys and sells stocks between classes and over his lunch break.He never has time to really analyze a security so just trades the stock symbols that other investors appear to be trading.Stewart is which one of the following?

Choose correct answer/s
A
noise trader
B
arbitrageur
C
crasher
D
regret averter
E
myopic loss averter
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Question 11
Multiple Choice

Which one of the following is an investment risk that investors face in addition to firm-based risk and market-based risk?

Choose correct answer/s
A
management-related risk
B
inflation risk
C
supply chain risk
D
interest rate risk
E
sentiment-based risk
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Question 12
Multiple Choice

Most people would tend to agree that technology stocks were highly overvalued in the late 1990's.This time period is best described as a technology:

Choose correct answer/s
A
crash.
B
circle.
C
bubble.
D
limit.
E
arbitrage.
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Question 13
Multiple Choice

A sudden and severe decline in market prices is best described as a market:

Choose correct answer/s
A
crash.
B
revolver.
C
bubble.
D
limit.
E
mispricing.
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Question 14
Multiple Choice

Which one of the following best illustrates an error which you,as a manager,might make due to overconfidence?

Choose correct answer/s
A
overestimating the best outcome expected from a project while underestimating the possibility of a less favorable outcome
B
assuming that a new project will be profitable since similar projects in the past were successful
C
assuming that your expectations of the future outcome from a project are more accurate than the expectations of others within your organization
D
listening to the advice of subordinates with whom you agree while ignoring the advice of subordinates with whom you tend to disagree
E
downplaying the cost of future failure of an existing project since the project has already paid for itself
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Question 15
Multiple Choice

Assume you are an overconfident manager.You are most apt to do which one of the following more so than you would if you were not overconfident?

Choose correct answer/s
A
research a project more thoroughly before committing funds to commence it
B
accept risky projects that turn out to be less profitable than you expected
C
wait until new technology proves its worth before incorporating it into your firm's operations
D
avoid mergers and acquisitions
E
invest excess company cash more conservatively than your peers at other firms
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Question 16
Multiple Choice

Marzella Corp.is analyzing a project that involves expanding the firm into a new product line.The project includes the construction of a new manufacturing facility and the creation of a new distribution system.The project's financial projections will tend to have which one of the following characteristics if the person compiling those projections suffers from overoptimism?

Choose correct answer/s
A
overestimated construction costs
B
overestimated expenses
C
overestimated net present values
D
underestimated profits
E
underestimated sales estimates
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Question 17
Multiple Choice

When weighing a decision,Kate places greater emphasis on opinions that match her own than she does on opinions offered by others that disagree with her personal point of view.Kate illustrates which one of the following?

Choose correct answer/s
A
frame dependence
B
overconfidence
C
gambler's fallacy
D
confirmation bias
E
overoptimism
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Question 18
Multiple Choice

Kaiser Marketing recently conducted a survey on behalf of Health Products.The primary purpose of the survey was to illustrate to Health Products that it was relying on results of previous studies that,according to Kaiser,were unreliable due to the wording of the survey questions.To prove this point,Kaiser conducted a two-prong survey.In the first prong,the survey questions were worded such that the answers tended to sound positive.In the second prong,the survey questions were re-worded such that the answers tended to convey a negative feeling.Both sets of survey questions should have resulted in similar results as the information solicited was essentially identical.However,the survey results varied significantly.This survey best illustrates which one of the following?

Choose correct answer/s
A
mental accounting
B
overconfidence
C
self attribution bias
D
confirmation bias
E
frame dependence
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Question 19
Multiple Choice

Recently,a neighbor you have known for years won a lottery and received a $250,000 prize.This neighbor decided to invest all of his winnings in a new business venture that he knew only had a five percent chance of success.Previous to this,the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week.Which one of the following behaviors most applies to your neighbor's decision to invest in this business venture now?

Choose correct answer/s
A
overoptimisim
B
affect heuristic
C
loss aversion
D
house money
E
get-evenitis
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Question 20
Multiple Choice

Amy has been investing in stocks so she can accumulate sufficient money to purchase her own home.These savings are currently valued at $82,500.As recently as last month,her savings were worth in excess of $110,000.Today,Amy found the perfect house.She knows she can withdraw her savings to pay on this house and borrow the remaining balance from her father at zero percent interest.However,Amy is refusing now to buy any house until her savings increase in value back to their $110,000 previous valuation.Amy is displaying which one of the following behaviors?

Choose correct answer/s
A
representativeness heuristic
B
loss aversion
C
house money effect
D
underconfidence
E
confirmation bias
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