Jaggannath University, Dhaka

Department of Finance
Assignment
On
Glossary (Chapter- 1 to 5)

Submitted To:
Dr. Shaikh Masrick Hasan
Associate Professor
Department of Finance
Jagannath University, Dhaka

Submitted By:
Group: 1
On behalf of all the groups
Table of Contents
CHAPTER: 1 ................................................................................................................................................... 3
PSYCHOLOGY AND FINANCE ........................................................................................................................ 3
CHAPTER: 2 ................................................................................................................................................... 9
Overconfidence ............................................................................................................................................ 9
Chapter: 3 ................................................................................................................................................... 15
Pride and Regret ......................................................................................................................................... 15
Chapter: 4 ................................................................................................................................................... 22
Risk Perceptions ......................................................................................................................................... 22
Chapter: 5 ................................................................................................................................................... 25
Decision Frames ......................................................................................................................................... 25
 CHAPTER: 1
PSYCHOLOGY AND FINANCE
1. Psychology and Finance: This refers to the intersection of psychology and financial decision-
making. It explores how human emotions, behaviors, and cognitive biases influence financial
choices, investments, and market dynamics.
2. Dramatic Solution: A solution that is characterized by being highly impactful, noticeable, or
significant in resolving a problem or addressing a situation. It often involves drastic actions or
changes.
3. Notoriously Bad: Something that has a well-known reputation for being of poor quality,
unreliable, or ineffective. It implies that the thing in question is widely recognized for its negative
attributes or outcomes.
4. Magnified: To be made larger, more significant, or more intense. In various contexts, it can refer
to amplifying the effect, importance, or visibility of something.
5. Cognitive Bias: This refers to systematic patterns of deviation from rationality in judgment or
decision-making. Cognitive biases are often the result of mental shortcuts or heuristics that the
brain uses to process information, leading to deviations from rationality, accuracy, or fairness.
6. Economic Turmoil: A state of disorder, instability, or uncertainty in an economy, characterized
by significant fluctuations, downturns, or crises in economic indicators such as GDP growth,
employment rates, and inflation.
7. Overconfidence: The tendency to have excessive confidence in one's own abilities, judgments, or
beliefs. It often leads individuals to overestimate their skills or the accuracy of their predictions,
sometimes resulting in poor decision-making.
8. Investment Bank: A financial institution that provides a range of services to corporations,
governments, and other entities. These services typically include underwriting securities (such as
stocks and bonds), facilitating mergers and acquisitions, providing advisory services, and
managing assets.
9. Commercial Bank: A type of financial institution that offers services primarily to individuals and
businesses. These services typically include deposit accounts, loans, mortgages, and basic financial
products.
10. Hedge Funds: Investment funds that employ various strategies to generate returns for their
investors. Unlike mutual funds, hedge funds are typically open only to accredited investors and
have more flexible investment strategies, often involving higher risk.
11. Ill Informed: Lacking sufficient knowledge or information about a particular subject or situation.
Being ill-informed can lead to poor decision-making or misunderstanding of issues.
12. Behavioral Finance: A field of study that combines psychology and economics to understand how
psychological factors influence financial decisions and market outcomes. It explores how
emotions, cognitive biases, and social influences affect investor behavior and market dynamics.
13. Loss Aversion: Loss aversion is a cognitive bias where people tend to prefer avoiding losses over
acquiring equivalent gains.
14. Regret Aversion: Regret aversion refers to the tendency of individuals to avoid making decisions
that they fear will result in regret.
15. Feedback Loop: A feedback loop is a process where the output of a system influences its own
operation.
16. Traditional finance: Traditional finance is based on the premise that market participants are
rational, have access to all relevant information, and make decisions that maximize their own
utility or wealth. This approach assumes that financial markets are efficient, meaning that asset
prices reflect all available information and that any deviations from fair value are quickly
corrected. The cornerstone of traditional finance is the efficient market hypothesis (EMH), which
suggests that it is impossible to consistently outperform the market because asset prices already
incorporate and reflect all relevant information.
17. Rationality: Traditional finance assumes that individuals and market participants are rational
decision-makers who process information accurately and make decisions that maximize their
utility or wealth.
18. Efficient Market Hypothesis: This theory asserts that asset prices fully reflect all available
information, making it impossible to consistently outperform the market.
19. Emphasis on Quantitative Models: Traditional finance heavily relies on quantitative models,
such as the Capital Asset Pricing Model (CAPM) and the Black-Scholes model, to explain and
predict market behavior.
20. Behavioral finance, on the other hand, challenges the assumptions of traditional finance by
incorporating insights from psychology and behavioral economics to explain how individuals and
markets make financial decisions. It recognizes that human behavior is often influenced by
cognitive biases, emotions, and social factors, leading to systematic deviations from rationality
and market efficiency.
21. Bounded Rationality: Behavioral finance acknowledges that individuals have limited cognitive
abilities and often make decisions under conditions of uncertainty, leading to deviations from
perfect rationality.
22. Cognitive Biases: Behavioral finance identifies various cognitive biases, such as overconfidence,
loss aversion, and anchoring, that can lead to suboptimal decision-making and market
inefficiencies.
23. Market Anomalies: Behavioral finance highlights market anomalies and phenomena that cannot
be explained by traditional finance theories, such as stock market bubbles, herding behavior, and
excessive volatility.
24. Traditional finance and behavioral finance differ in their assumptions about human behavior
and market efficiency. While traditional finance assumes rationality and market efficiency,
behavioral finance recognizes the impact of cognitive biases and psychological factors on
decision-making and market outcomes. Traditional finance relies on quantitative models and the
efficient market hypothesis, while behavioral finance emphasizes the study of human behavior and
the identification of market anomalies.
25. Emotional filters: Emotional filtering is defined as change recipients' emotionally charged
interpretations of agents' actions that materially influence recipients' cognitive and behavioral
responses to the proposed change.
26. Psychological biases: A cognitive bias is a systematic pattern of deviation from norm or
rationality in judgment. Individuals create their own "subjective reality" from their perception of
the input. An individual's construction of reality, not the objective input, may dictate their behavior
in the world.
27. Inadequate: lacking the quality or quantity required; insufficient for a purpose.
28. Dividend: A dividend is a distribution of a portion of a company's earnings to its shareholders. It's
typically paid out in cash, but can also be in the form of additional shares or other assets.
Companies often pay dividends regularly as a way to reward shareholders for investing in the
company.
29. DJIA: The DJIA, or Dow Jones Industrial Average, is a stock market index that measures the
performance of 30 large, publicly-owned companies trading on the New York Stock Exchange
(NYSE) and the NASDAQ. It's one of the most widely followed stock market indices in the world
and is used as an indicator of the overall health of the stock market and the economy.
30. Price weighted average: A price-weighted average is a type of stock market index in which the
components are weighted based on their prices rather than their market capitalizations. In a price-
weighted index, higher-priced stocks have a greater impact on the index's movements compared
to lower-priced ones, regardless of the companies' actual sizes or market values. The Dow Jones
Industrial Average (DJIA) is an example of a price-weighted index, where the price movements
of its 30 component stocks are used to calculate the index's value.
31. Investors psychology: Investor psychology refers to the emotions, attitudes, and behaviors that
influence investors' decision-making processes in the financial markets. It encompasses factors
such as fear, greed, optimism, pessimism, risk tolerance, and cognitive biases. Understanding
investor psychology is crucial because it can drive market trends, affect asset prices, and influence
investment outcomes.
32. Anchoring: Anchoring is a cognitive bias where individuals rely too heavily on the initial piece
of information they receive (the "anchor") when making decisions, even if that information is
irrelevant or inaccurate. This bias can influence perceptions and judgments, leading people to make
decisions that are skewed towards the initial reference point, rather than objectively considering
all available information.
33. Behavioral finance: This a field of study that combines psychology and economics to understand
how individuals make financial decisions. It examines how cognitive biases, emotions, and other
psychological factors affect people's financial behaviors, often deviating from the assumptions of
traditional finance.
34. Traditional finance: This refers to the conventional methods, theories, and practices used in the
financial industry. It encompasses concepts like stocks, bonds, mutual funds, and traditional
banking services.

35. Rational: In behavioral finance, the term "rational" is often examined in contrast to the traditional
finance assumption of perfect rationality. It acknowledges that individuals may not always make
fully rational decisions due to cognitive biases and emotional factors influencing their choices.

36. Cognitive biases: In behavioral finance refer to systematic patterns of deviation from rationality
in judgment or decision-making.

37. Cognitive processes: It helps explain why individuals may deviate from the rational behavior
assumed in traditional finance models.

38. Systematic cognitive error: In behavioral finance refers to a consistent pattern of irrational
decision-making stemming from cognitive bias.

39. Predictable cognitive error: I behavioral finance is the disposition effect and describes the
tendency of investors to sell winning investments too early and hold onto losing investments for
too long.
40. Investor: An investor is a person or organization that provides capital with the expectation of
earning a return on their investment.
41. Prospect theory: Prospect theory is a theory of behavioral economics, judgment and decision
making that was developed by Daniel Kahneman and Amos Tversky in 1979.
42. Potential gain: Potential Capital Gain (PCG) is an estimated percentage of a fund's assets that
may be distributed as future capital gains.
43. Reference point: A reference point is a place or object used for comparison to determine if
something is in motion.
44. Pervasive behaviour: Engage in repetitive behaviors like rocking or hand flapping. Have
difficulty expressing their thoughts through language. Have a hard time with routine changes.
45. Concave & convex function: A function that has an increasing first derivative bends upwards and
is known as a convex function. On the other hand, a function, that has a decreasing first derivative
is known as a concave function and bends downwards. We also describe a concave function as a
negative of a convex function.
46. Behavioural bias: Behavioural biases are systematic, predictable errors or influences that apply
to everyone when they interpret information and make decisions.
47. Cognitive error: Two main types of cognitive errors are described. The first error is probability
overestimation, or jumping to negative conclusions and treating negative events as probable when
in fact they are unlikely to occur. The second error is catastrophic thinking, or blowing things out
of proportion.
48. Psychological bias: Psychological bias refers to systematic patterns of deviation from rationality
in judgment or decision-making.
49. Cognitive bias: Cognitive bias is a systematic thought process caused by the tendency of the
human brain to simplify information processing through a filter of personal experience and
preferences.
50. Gambler’s fallacy: Gambler’s fallacy refers to the erroneous thinking that a certain event is more
or less likely, given a previous series of events.
51. Law of small numbers: Law of small numbersis a cognitive bias and refers to the tendency to
draw broad conclusions based on small data.
 CHAPTER: 2
Overconfidence
Overconfidence: Overconfidence refers to a bias in which individuals have excessive confidence
in their own abilities, knowledge, or judgments. This can lead to making risky decisions or
overestimating one's own capabilities. It is important to be aware of this bias and to seek feedback
from others or consider different perspectives to avoid potential pitfalls. If you have any specific
questions or concerns related to overconfidence, feel free to share them so I can provide more
tailored assistance.
Miscalibration: Miscalibration is the systematic underestimation of the range of potential
outcomes, i.e. excessive confidence about having accurate information.
The better-than-average effect:The better-than-average effect describes the tendency of people
to perceive their skills and virtues as being above average.
Act: The process of doing something.
Illusion: something that is believed to be true or real but that is actually false or unreal.
Gallup/Paine: a sampling of public opinion on a particular issue or of the degree of information
among the public about a particular thing or of opinion or information in a particular group taken
by questioning a representative cross section.
Stock bubble: A stock market bubble is a type of economic bubble taking place in stock markets
when market participants drive stock prices above their value in relation to some system of stock
valuation.
Collapse: to fall or shrink together abruptly and completely.
Portfolio: A portfolio's meaning can be defined as a collection of financial assets and investment
tools that are held by an individual, a financial institution or an investment firm.
Self-attribution Bias: The self-attribution bias is which leads to believe that successes are
attributed to skill while failure is caused by bad luck.
Overconfident trading: Overconfident trading refers to the behavior of investors or traders who
exhibit an excessive belief in their ability to predict market movements or select winning
investments, often leading to higher levels of risk-taking, frequent trading, and poor investment
outcomes.
Turnover: Turnover is the percentage of stocks in the portfolio that changed during the year.
Investor: A person or group of people that puts its money into a business or other organization in
order to make a profit.
Overconfident: Excessively or unjustifiably confident.
Turnover: A concept in accounting that shows how quickly a company runs its business.
Portfolio return: It is the gain or loss achieved by a portfolio. It can be calculated on a daily or
long-term basis.
Buy and Hold strategy: It is an investment approach where individuals purchase securities, like
stocks or bonds, with the intention of holding them for a long period, typically years or decades.
Excessive Trade: When the transactions in your account do not meet your investment objectives
or risk tolerance.
Overconfidence bias: Overconfidence bias is a cognitive bias that can negatively affect
investment returns by leading people to overestimate their skill and knowledge, trade too
frequently, incur higher costs, or ignore relevant information and feedback. Because of this bias,
investors can make poor financial decisions.
High Volume Trader: Higher trade volumes for specified security mean higher liquidity, better
order execution, and a more active market for connecting a buyer and seller.
Investor Survey: A method of collecting data from investors to assess their level of
overconfidence through questioning.
Historical Performance: Past investment returns and trading records of investors, used to
evaluate actual skill levels.
Correlation: A statistical measure indicating the relationship between two variables, such as
overconfidence and trading volume.
Trading Volume: The total number of shares or contracts traded in a given period, reflecting
market activity.
Aggregate Market: The overall stock market, encompassing various securities and investors.
Excessive Trading: Trading activity that exceeds what is considered rational or necessary.
Stock Exchanges: Platforms where securities are bought and sold, facilitating trading among
investors.
Market Returns: Changes in the value of investments over a specific period, often expressed as
a percentage.
Bull Market: A market characterized by rising prices and positive investor sentiment.
Bear Market: A market characterized by falling prices and negative investor sentiment.
Market Trend: The general direction in which the market is moving over time.
Financial Behavior: Actions and decisions made by investors regarding their investments and
trading activities.
Investment Skills: Abilities and knowledge related to selecting and managing investments
effectively.
Market Psychology: The collective emotions and attitudes of investors that influence market
behavior.
Risk Perception: How investors perceive and evaluate the risks associated with their investments.
Market Sentiment: The overall attitude or mood of investors toward the market or specific
securities.
Trading Behavior: Patterns and habits exhibited by investors when buying and selling securities.
Market Cycle: The recurring pattern of bull and bear markets, reflecting changes in economic
conditions and investor sentiment.
Wall Street Adage: Traditional sayings or maxims commonly referenced in the financial industry,
often based on historical observations and experiences.
Rational investors: Rational investors typically make decisions based on thorough analysis, risk
assessment, and a clear understanding of market trends.
High-risk stocks: Investing in high-risk stocks can potentially lead to higher returns, but it also
comes with a greater chance of losing money. It's important to carefully research and consider your
risk tolerance before investing in high-risk stocks.
Prevalent risk: Prevalent risks are risks that are commonly encountered or widely present in a
particular situation or environment. It's important to identify and address prevalent risks to ensure
safety and security.
Portfolio Volatility: Portfolio volatility refers to the degree of variation in the returns of a portfolio
over time. It is a measure of the risk associated with investing in a particular portfolio. The higher
the volatility, the greater the potential for both gains and losses. It is important for investors to
consider portfolio volatility when making investment decisions to ensure they are comfortable with
the level of risk involved.
Illusion of knowledge:

This refers to the tendency for people to believe that the accuracy of their forecasts increases with
more information that is more information increases one’s knowledge about something and
improves one’s decision.

Self-Assessment:

The act or process of analyzing and evaluating oneself or one’s action.

Unfiltered Information: Raw data directly from the source, like company financial statements,
which can be difficult to understand due to jargon and complicated accounting rules.

Filtered Information:

Unfiltered data interpreted and packaged by professionals for general investor consumption, such
as information from analysts or services like Value Line.

Overconfident:

Having excessive confidence in one's abilities or judgments,

often leading to taking excessive risks.

Momentum Strategy:

A strategy where stocks with recent good performance are recommended for purchase.
Trading Volume:

The number of shares or contracts traded in a security or an entire market during a given period of
time.

Value Strategy:

A strategy where stocks with recent poor performance are recommended for purchase, based on
the belief that they are undervalued.

Choice:

Making an active choice induces control.

Outcome Sequence:

The way in which an outcome occurs affects the illusion of control. Early positive outcomes give
the person a greater illusion of control than early negative outcomes do.

Task Familiarity:

The more familiar people are with a task, the more they feel in control of the task.

Information: When a greater amount of information is obtained, the illusion of control is greater
as well.

Active Involvement:

When a person participates a great deal in a task, the feeling of being in control is also
proportionately great. Online investors have high participation rates in the investment process.

Past Successes:

Overconfidence is learned through past success. If decisions are good, then it is attributed to skill
and ability.

Bull market:
A bull market is a period in the financial market when prices are on the rise and investor confidence
is high.

Overconfidence:

Overconfidence describes a situation where someone has an inflated belief in their abilities or
chances of success.

Trading:

Trading refers to the act of buying and selling financial instruments with the goal of profiting from
short-term fluctuations in their price.

Brokerage firm:

A financial institution that facilitates the buying and selling of financial securities between a buyer
and a seller.

Market adjusted return:

Measures how much an investment outperforms or underperforms compared to a benchmark index

or the overall market. A positive alpha indicates outperformance, a negative alpha indicates
underperformance, and zero means the investment performed in line with the market.

Total return:

Measure of an investment's performance that includes both capital appreciation (and depreciation)
and any income generated by the investment, such as dividends or interest payments.

Total Return= Capital Appreciation + Income Received

 Chapter: 3
Pride and Regret
1. Pride: Pride is the emotional joy of realizing that a decision turned out well.

2. Disposition Effect: The disposition effect refers to the tendency of investors to sell winning
investments too early and hold onto losing investments for too long. The disposition effect is a
behavioural finance phenomenon where investors tend to sell assets that have increased in value, while
holding onto assets that have decreased in value. Essentially, it's the tendency to "cut winners and ride
losers," driven by emotions such as regret and fear of regret.

3. Mutual Fund: Mutual funds are actively managed portfolios of stocks, bonds, or other assets, often
subject to this effect. A mutual fund is a professionally managed investment fund that pools money
from many investors to purchase securities. These funds can invest in stocks, bonds, money market
instruments, or a combination of these assets, and they are managed by fund managers according to the
fund's stated investment objectives.

4. Reverse Disposition Effect Pattern: The reverse disposition effect pattern suggests that investors may
be more inclined to hold onto winning investments and sell losing ones too quickly. This pattern may
be more prevalent in index funds, which passively track a market index rather than being actively
managed. This term could refer to a pattern where investors, instead of exhibiting the typical disposition
effect behaviour of selling winners and holding onto losers, do the opposite. In other words, they might
hold onto winning investments and sell losing investments, which goes against the conventional
disposition effect.

5. Index Fund: An index fund is a type of mutual fund or exchange-traded fund (ETF) that aims to
replicate the performance of a specific index, rather than being actively managed by fund managers,
index funds passively track the performance of a designated index by holding the same securities in the
same proportion as the index. They typically have lower fees compared to actively managed funds.

6. Regret: In behavioral finance, regret refers to the emotional distress experienced by investors after
making a decision that leads to a poor outcome. This can influence future investment decisions, where
an investor might avoid certain choices purely to avoid the feeling of regret, even if those choices might
be objectively sound.

7. Seeking Pride: This term relates to the emotional reward investors seek from making successful
investment decisions. Investors may hold onto stocks that have gained value longer than is optimal or
choose investments that are perceived as prestigious or socially responsible to foster a sense of pride,
even if such decisions may not align with their financial goals or risk tolerance.
8. Tax Benefit: In behavioral finance, the tax benefit can sometimes influence investment decisions
irrationally. Investors might hold onto investments longer than they should to qualify for long-term
capital gains tax treatment or might sell at suboptimal times to realize a tax loss, potentially
overshadowing more strategic investment considerations.

9. Abnormal Volume: This refers to trading volume that significantly deviates from the norm for a
security or market. In behavioral finance, abnormal volume can signal widespread behavioral biases
affecting the market, such as overreaction to news or herd behavior.

10. Positive Abnormal Volume: This occurs when the trading volume of a security is unusually high due
to positive events or perceptions, such as better-than-expected earnings reports or upgrades by analysts.
This can indicate excessive optimism or euphoria in the market.

11. Negative Abnormal Volume: This happens when the trading volume of a security is unusually high
due to negative events or perceptions, such as worse-than-expected earnings reports or downgrades.
This can indicate excessive pessimism or panic in the market.

12. Actual Trade: In behavioral finance, an actual trade refers to a transaction that has been executed in
the market, reflecting the real-world impact of investors' psychological biases and decisions, contrary
to theoretical or model-based trades.

13. Round Trip Trade: This involves buying and subsequently selling a financial instrument within a short
period. Behavioral biases can influence such trades, where investors might engage in round trip trading
to chase gains based on recent trends or to correct perceived mistakes hastily.

14. Price Gain: This refers to the increase in the price of an asset. In behavioral finance, price gains can
lead to psychological phenomena such as the bandwagon effect, where investors buy into rising assets
purely because they are increasing in value, disregarding underlying fundamentals.

15. Are investors quick to close out a position when it has taken a loss or when it has had a gain?

Ans: If the person buys a stock that goes up quickly, he/she will be more inclined to sell it quickly. If
the person buys a stock that goes down or remains level, they are more inclined to hold while waiting
for it to go up.

16. Selling Winners Too Soon: The act of selling successful investments prematurely, often resulting in
missed potential future gains.

17. Holding Losers Too Long: The behaviour of retaining underperforming investments in the hope of a
future recovery, despite evidence suggesting otherwise.
18. Regret Aversion: The fear of experiencing regret, which can lead investors to make suboptimal
decisions such as selling winners prematurely to avoid the regret of a potential decline in value.

19. Pride Seeking: The desire for recognition and affirmation, which can influence investors to hold onto
losing investments longer than rational analysis would suggest, to avoid admitting mistakes.

20. Tax Inefficiency: The negative impact on investment returns caused by the tendency to sell winning
investments, resulting in higher capital gains taxes, compared to holding onto losing investments.

21. Stock Trading Experiment: A controlled study designed to observe and analyse investor behaviour,
often using simulated stock trading scenarios to test theories and hypotheses about financial decision-
making.

22. Investment Positions: The study of investment positions involves analysing how individuals make
decisions about their portfolio allocation, which can be influenced by cognitive biases and emotional
responses and behavioural tendencies.

23. Reference Point: A reference point typically refers to a specific price or value that an investor uses as
a benchmark for evaluating the performance of their investments.

24. Initial Public Offering (IPO): An IPO is the process by which a private company offers its shares to
the public for the first time, allowing it to raise capital by selling ownership stakes to investors.

25. The Disposition Effect: The disposition effect suggests that investors are more willing to sell when
the stock is a winner and are reluctant to sell when it is a loser.

26. Offer Price: The offer price, also known as the offering price or issue price, is the price at which shares
of a company are initially offered to investors during an IPO or a secondary offering.

27. Trading Volume: Trading volume is an important indicator of market liquidity and refers to the total
number of shares of a security that are bought and sold within a specific period, such as a day, week,
or month.

28. Exercising of Stock Options: Exercising stock options involves the process by which the holder of a
stock option contract buys or sells the underlying stock at the predetermined price (the strike price)
before the option's expiration date.

29. Premium Value: Premium value refers to the extra amount paid for a security or an option above its
intrinsic value. The premium value is influenced by factors such as the underlying asset's price
volatility, time to expiration, and interest rates.
30. Mutual Fund: A mutual fund is a pool of money collected from multiple investors to invest in various
securities like stocks, bonds, or other assets.

31. Underreaction: Underreaction refers to a phenomenon where the market fails to fully incorporate new
information into asset prices in a timely manner.

32. Unrealized Capital Gain: Unrealized capital gain refers to the increase in the value of an investment
that has not yet been sold. It represents the difference between the current market value of an asset and
its original purchase price.

33. Loss Aversion: Loss Aversion refers to the tendency for investors to strongly prefer avoiding losses
over acquiring equivalent gains.

34. The Disposition Effect: The disposition effect suggests that investors are more willing to sell when
the stock is a winner and are reluctant to sell when it is a loser.

35. Investment Savvy: Investment Savvy refers to the level of knowledge, skill, and experience an investor
possesses in making investment decisions.

36. Less-Sophisticated Investors: Less-sophisticated investors are investors who may lack experience,
knowledge, or access to sophisticated investment strategies and instruments.

37. Professional Futures Traders: Professional futures traders are individuals or entities who engage in
trading futures contracts as their primary occupation or profession.

38. Mutual Fund Managers: The mutual fund managers are professionals responsible for managing
investment portfolios within mutual funds.

39. Sunk Emotional Cost: This refers to the emotional attachment or investment that individuals have in
a particular decision or course of action, even when it is no longer rational or beneficial and it can lead
to irrational behaviour, such as holding onto underperforming investments due to attachment or fear of
regret.

40. Mutual Fund Portfolios: Mutual fund portfolios are collections of securities held by mutual funds,
representing the combined investments of the fund's investors.

41. Regret Aversion: Regret aversion refers to the tendency for individuals to avoid taking action or
making decisions that may result in feelings of regret and can lead investors to hold onto losing
positions or to avoid making changes to their investment strategies, even when it may be rational to do
so.
42. Underperforming Positions: Underperforming positions are investments that have not performed as
well as expected or compared to relevant benchmarks or market indices.

43. Highly Performing Positions: Highly performing positions are investments that have delivered strong
returns relative to expectations or benchmarks.

44. Actual trades: Actual trades refer to real transactions executed in financial markets involving the
buying and selling of assets such as stocks, bonds, currencies, or commodities.

45. Buying back stock: Buying back stock refers to a company repurchasing its own outstanding shares
from the open market. This process involves a company using its available funds to buy back shares
that were previously issued and are currently held by investors

46. Completed trade: Completed trade refers to the successful execution of a transaction between parties,
where goods, services, or financial assets are exchanged according to agreed-upon terms.

47. Pervasive behaviour: Pervasive behaviour refers to conduct or actions that are widespread and
prevalent across a particular context or environment. It suggests a behaviour or trait that is commonly
observed and influential throughout a given system or community. In various fields such as psychology,
sociology, and economics, understanding pervasive behaviours can be crucial for analysing trends,
making predictions, and implementing effective strategies.

48. Regret: Regret is a negative emotion experienced when one feels sorrow, disappointment, or remorse
over past actions, decisions, or situations.

49. Repurchased: Repurchased typically refers to the act of buying back something that was previously
sold or disposed of. In finance, it often refers to a company buying back its own shares from the market,
which is known as share repurchase or stock buyback.

50. Sophisticated investor: Sophisticated investor refers to an individual or entity with a high level of
financial knowledge, expertise, and experience in investment matters

51. Salient: Salient refers to something that is particularly noticeable, prominent, or significant within a
given context. It can describe features, characteristics, or aspects that stand out and are easily observable
or important to consider.

52. Traditional finance: Traditional finance encompasses the conventional methods and systems used in
managing assets, investments, and transactions, often involving established institutions, centralized
banking, and regulatory frameworks governed by government entities.
53. Winner stock: Winner stock could refer to a stock that has experienced significant growth or
outperformed the market over a certain period. These are often stocks of companies that have strong
financial performance, promising products or services, innovative business models, or other factors that
contribute to their success in the market.
 Chapter: 4
Risk Perceptions
House-Money Effect: The House-Money Effect is a behavioral finance concept in which people are more
likely to take risks with money perceived as "house money" or winnings than with their own finances. It's
similar to playing with the casino's money, so people may be more ready to bet or spend aggressively.
Get Events: Get events’ in behavioral finance is the tendency of investors to hang onto lost investments
for an extended period in the hopes that they would eventually rebound and enable the investor to break
even.
Confidence and Self-Efficacy: Financial losses can impact individuals' confidence and self-efficacy in
their decision-making abilities. After experiencing a loss, individuals may doubt their capacity to make
successful decisions, leading them to adopt a more cautious approach towards risk. The erosion of
confidence and self-efficacy can contribute to increased risk aversion in subsequent choices.
Regret Avoidance: Regret avoidance theory suggests that people are motivated to avoid feelings of
regret that arise from making decisions with unfavorable outcomes. After experiencing a financial loss,
individuals may be more cautious in their decision-making to avoid the regret associated with further
losses. This aversion to regret can lead to increased risk aversion in subsequent choices.
Break-even Effect: After experiencing losses, individuals may make riskier decisions to try to return to
their initial position. / The phenomenon where individuals become more willing to take risks after
experiencing losses in order to "break-even" and recoup their losses. / After losing, people try to win back
what they lost.
Gambler's Fallacy: The belief that future outcomes are influenced by past outcomes, even though each
event is independent of one another. / Thinking that because something hasn't happened for a while, it's
"due" to happen soon. / The mistaken belief that if something happens frequently in succession, it's less
likely to occur again soon. / believing that luck balances out in the end.
Anchoring: Relying too heavily on the initial piece of information received when making decisions, even
if it's not the most relevant. / Becoming fixated on the first number or idea encountered and allowing it to
unduly influence decision-making. / Getting stuck on the first piece of information.
Market Making: Engaging in trades by both buying and selling securities in a market to maintain its
smooth operation. / Offering to buy or sell stocks to keep trading flowing.
Proprietary Trader: Someone who trades stocks, bonds, or other assets using the money of the firm they
work for, not their personal funds. / Traders using the company's money, not their own.
Bust Primed Subjects: In behavioral finance, "bust-primed" subjects typically refer to individuals who
have experienced financial downturns or losses, leading them to exhibit certain behavioral patterns such
as heightened risk aversion, loss aversion, or a tendency to avoid similar investments or strategies in the
future. These subjects may be more susceptible to making decisions influenced by emotions and past
negative experiences.
Bull market scenario: A financial market characterized by rising asset prices, typically accompanied by
optimism, investor confidence, and overall positive economic indicators. During a bull market, there is
widespread belief that prices will continue to increase, leading to increased buying activity and upward
momentum.
Bear market: When investors are influenced by negative sentiment due to falling asset prices, exhibit
pronounced biases like loss aversion and herding behavior. This often leads to selling assets out of fear,
worsening the downward trend. Cognitive biases like overreaction and anchoring can prolong the
downturn as investors dwell on past losses and adopt overly pessimistic views.
Endowment effect: One situation known as the endowment effect occurs when someone values an item
they currently possess more highly than they would if they did not own it.
Cognitive dissonance: The unease a person experiences when their actions conflict with their principles
or beliefs is known as cognitive dissonance.
The bubble collapses an economic cycle known as a bubble is defined by a significant increase in market
value, especially in the price of assets. This rapid inflation is followed by a rapid contraction, often known
as a "crash" or a "bubble collapse," in which the value of the asset quickly decreases.
Memory: Memory is a sense of the physical and emotional experience rather than a precise account of
what happened. The course of events has an impact on this impression. Different aspects of the
experience can be stored via the brain's event-recording process. Subsequent recall is based on these
stored attributes.
Investment Industry: The investment industry is a broad sector of the financial services economy that
deals with the purchase, sale, and management of various investments. This includes stocks, bonds,
mutual funds, real estate, and other financial instruments.

Investment Risk: Investment risk refers to the possibility of losing money on an investment. It’s the
uncertainty associated with the actual return on investment differing from what was expected.

Cognitive Dissonance: Cognitive dissonance is the mental discomfort that results from holding two
conflicting beliefs, values, or attitudes. It’s a state of tension that motivates people to try and achieve
consistency between their thoughts and actions.

Cognitive Problems: Cognitive problems refer to difficulties with mental processes that include learning,
thinking, remembering, and problem-solving. These problems can range from mild to severe and can
interfere with a person’s daily activities.

S&P 500 Index: The S&P 500, or Standard and Poor’s 500, is a stock market index that tracks the
performance of 500 large, publicly traded companies in the United States.

AAII: The American Association of Individual Investors (AAII) is a non-profit organization founded in
1978 that focuses on investor education. Their goal is to equip individuals with the tools and knowledge
to manage their own investment portfolios and make sound financial decisions.

Disposition Effect: The disposition effect is a behavioral anomaly in finance that describes the tendency
of investors to sell assets that have increased in value (winning assets) while holding onto assets that have
decreased in value (losing assets).

Psychological Bias: Psychological bias refers to systematic patterns in how people think that can lead to
errors in judgment.

Risk Aversion: Risk aversion refers to an investor’s preference for lower risk investments, even if it
means sacrificing potentially higher returns.

House Money Effect: The house money effect is a behavioral finance concept that describes people’s
tendency to take more risks with profits they’ve already made, as opposed to their original investment or
their own earned income.

Snake Bite Effect: The snake bite effect in behavioral finance describes how a negative experience with
an investment can make people become more risk-averse in the future.
 Chapter: 5
Decision Frames
positive framing: Positive framing can have a significant impact on financial decision-making.
When information is presented in a positive light, emphasizing potential gains and benefits,
individuals tend to perceive the decision as less risky and more attractive. This can influence their
willingness to take on financial opportunities or risks. However, it's important to note that while
positive framing can influence decision-making, it may not always lead to optimal outcomes. It's
essential for individuals to balance positive framing with critical thinking and careful consideration
of the potential risks and downsides associated with a financial decision.

framing & choise: “Framing and choice" typically refers to the concept that how a decision or
situation is presented, or "framed," can significantly influence the choices people make. Framing
refers to how information is presented or structured. The framing of a situation can emphasize
certain aspects while downplaying or ignoring others. For example, presenting the same
information in a positive or negative light can lead to different perceptions and decisions.

On the other hand, choice refers to the decision-making process where individuals select from
among alternative options. The choices people make can be influenced by various factors,
including how the options are presented to them (framing).

negative framing: Negative framing can significantly impact financial decision-making. When
information is presented in a negative context, emphasizing potential losses or risks, individuals
tend to become more risk-averse and conservative in their choices. Risk & loss aversion, emotional
influence, decision paralysis, biased information processing are the key components that can make
a significant impact on decision making when information is negatively framed.

framing effects in non-emotional settings: Yes, framing effects can occur in non-emotional
settings as well. Framing effects refer to the way that the presentation or framing of information
can influence decision-making and perceptions, often regardless of the actual content of the
information. For example, in a financial decision-making context, how information about potential
gains or losses is framed can significantly affect people's choices. Presenting information about an
investment in terms of potential gains might lead individuals to take on more risk compared to
framing the same information in terms of potential losses, even if the actual outcomes are identical.

narrow framing: Narrow framing is a concept from behavioral economics and decision theory.
It refers to the tendency of individuals to make decisions based on a limited set of options or
information, often ignoring broader context or alternative choices. When people engage in narrow
framing, they may fail to consider the full range of possible outcomes or alternatives, leading to
sub-optimal decisions.

For example, someone might narrowly frame a decision about buying a car by focusing solely on
the immediate cost of the vehicle without considering long-term maintenance expenses or
alternative transportation options. This narrow focus can result in overlooking better choices or
failing to account for potential risks.

Framing: The way information is presented or framed, which can influence decision-making.

Risk-Return Relationship: The positive relationship between risk and expected return in
finance, where higher-risk investments are expected to yield higher returns.

Risk Premium: The additional return expected from an investment to compensate for the level
of risk undertaken

Leverage: The use of debt to finance investments or operations, which increases the riskiness of
a firm's capital structure.

Growth Prospects: The potential for a company to grow its earnings, revenues, or market share
in the future.

Book-to-Market (B/M) Ratio: A financial metric that compares a company's book value (the
value of its assets according to the balance sheet) to its market value (the current market price of
its outstanding shares).

Asset Pricing Models: Mathematical frameworks used to determine the fair price of assets,
often incorporating factors such as risk and return expectations.

Expected Return: The anticipated return on an investment, based on factors such as historical
performance, risk assessment, and market conditions.

Negative Risk-Return Relationship: A situation where higher-risk investments are expected to

yield lower returns, contrary to traditional financial theory.

High-Net-Worth Clients: Individuals or households with substantial financial assets and/or net
worth, typically above a certain threshold.

Fortune Survey: An annual survey conducted by Fortune magazine that gathers opinions and
rankings from executives, analysts, and other professionals in various industries.

Solid Line vs. Dashed Line: Graphical representations used to compare different trends or
relationships, where the solid line typically represents observed data and the dashed line
represents theoretical or expected relationships.

Beta: A measure of a stock's volatility in relation to the overall market, commonly used in
finance to assess systematic risk. A beta greater than 1 indicates that the stock is more volatile
than the market, while a beta less than 1 indicates lower volatility.
Correlation: A statistical measure that describes the degree of association between two
variables. A positive correlation indicates that the variables move in the same direction, while a
negative correlation indicates they move in opposite directions.

Better/Worse Frame: A way of framing investment decisions in terms of whether a stock is

perceived as "better" or "worse" based on its expected return and risk level. This frame may not
accurately reflect the true risk-return relationship and can lead to suboptimal investment
decisions.

Prediction: Forecasting or estimating future outcomes.

Dow Jones Industrial Average: A stock market index that measures the performance of 30
large publicly-owned companies traded on the New York Stock Exchange and the NASDAQ.

Price Forecast: Predictions about the future level of a financial instrument, such as the price of a
stock or index.

Return Forecast: Predictions about the future performance of a financial instrument, typically
measured as a percentage return.

Extrapolation: Extending current trends or patterns into the future.

Representativeness Bias: A cognitive bias where people make judgments based on how similar
or representative an event is to a particular category or stereotype.

Mean Reversion: The tendency for prices or returns to move back toward their historical

average over time.

Forecasting Bias: Systematic errors in predictions or forecasts, often influenced by cognitive

biases or framing effects.

Michigan Survey of Consumers: A survey conducted by the University of Michigan that

measures consumer sentiment and expectations about the economy.

Duke/CFO Business Outlook Survey: A survey conducted by Duke University and CFO
magazine that gathers insights from chief financial officers about their expectations for business
conditions.

UBS/Gallup: A collaboration between UBS, a Swiss multinational investment bank, and Gallup,
a global analytics and advisory company, which conducts surveys on various economic and
financial topics.

Livingston Survey: A survey conducted by the Federal Reserve Bank of Philadelphia that
collects forecasts of key economic indicators from economists, analysts, and forecasters.
Price Targets: Analysts' predictions or estimates of the future Price level of a stock or financial
instrument.

Market Timing: Attempting to predict the future movements of financial markets in order to
buy or sell assets at advantageous times.

Disposition Effect: The tendency of investors to hold onto losing investments too long and sell
winning investments too soon.

Cognitive reasoning: Cognitive reasoning is the ability to analyze and perceive any given
information from different perspectives by breaking it down into manageable components and
structuring the information in a logical order.

Analytical thinking mode:Analytical thinking is used to dissect and study a problem in a logical
manner to determine a practical answer or solution.

Intuitive thinking mode : Intuition is an automatic, fast, and often unconscious way of thinking.
It's autonomous and efficient, requiring little attention or energy. But it's also prone to biases and
systematic errors because it relies heavily on emotion and past experiences.

Cognitive reflection: The Cognitive Reflection Test (CRT) is a psychological assessment

designed to measure a person's ability to suppress intuitive but incorrect responses in favour of
deliberate and reflective thinking. It typically consists of several short questions that seem intuitive
but require careful consideration to answer correctly.

Risk farming: Risk farming is a term that might not be immediately familiar. It could be
interpreted in a few ways depending on the context. It could refer to the practice of actively
managing risks within a business or project, akin to tending a farm where risks are the crops, and
you need to cultivate, monitor, and harvest them appropriately to mitigate negative impacts.
Alternatively, it could also refer to the deliberate pursuit of high-risk ventures or investments with
the hope of reaping substantial rewards, akin to farming where one plants seeds with the
expectation of a bountiful harvest.

When it comes to thinking style, it’s an individual’s preferred approach to processing information,
problem-solving, and decision-making. Some people might be more analytical, breaking down
problems into smaller components and analysing each part methodically. Others might be more
intuitive, relying on gut feelings and hunches to guide their decisions. Then there are those who
prefer a creative approach, generating multiple ideas and solutions, even if they seem
unconventional at first. Each thinking style has its strengths and weaknesses, and often a blend of
different styles can be advantageous in various situations.
Pension Decisions: Pension decisions define plan that decide whether to contribute how much to
contribute and how to allocate the investment to various asset classes.

In behavioural finance, pension decisions often involve understanding how psychological biases
can influence individuals’ choices regarding retirement savings, investment allocation, and
withdrawal strategies. Common biases include loss aversion, overconfidence, and present bias,
which can lead to suboptimal decisions such as inadequate savings, overly conservative investment
choices, or premature withdrawals. Behavioural finance seeks to identify these biases and develop
strategies to help individuals make better pension decisions, such as implementing automatic
enrollment, providing personalized guidance, and framing choices in a way that aligns with
individuals’ behavioural tendencies.

Payday Loan: Payday loans are short-term, high-interest loans based on your income. The
principal of the loan is generally equal to a part of your upcoming paycheque. Payday loans take
advantage of the borrower's need for immediate credit by charging a higher-than-normal interest
rate.

Claiming Social Security: Claiming Social Security” refers to the process of applying for and
receiving benefits from the Social Security Administration, a government agency in the United
States. Social Security benefits are typically claimed by individuals who are retired, disabled, or
survivors of deceased workers. The amount of benefits a person receives is based on factors such
as their earnings history and age at the time of claiming.