The four axioms of utility theory to hold true are completeness, transitivity, independence and continuity.It assigns value to individual gains and losses and weights them (utility theory focuses on final wealth).Prospect Theory proposes loss aversion opposed to risk aversion.People will Satisfice by choosing a non-optimal outcome thats still adequate.
Investors construct portfolios in layers that vary with risk and return expectations. AMH is a revised version of EMH that also factors in bounded rationality and satisficing. By avoiding contradictory info, people limit cognitive dissonance. Confirmation bias can lead to under diversifying a portfolio. Its a mental shortcut like all biases but the new information might not fit perfectly into the old models. Sample-Size Neglect is that the sample is assumed to represent the population. Bias leads people to believe that they have more impact on outcomes than. For example, highlighting potential gains over losses in a question can lead people to take on more risky positions. Availability bias can lead to limiting investment opportunity set and lack of diversification. Loss-Aversion pushes investors to keep holding onto losing positions and. For example, investors avoid selling winning positions fearing that they will miss out on more gains. This bias breaks down into error of commission (acting) and error of omission (not acting). Friendly Followers (FF) have a low to medium risk tolerance and primarily cognitive biases. Independent Individualists (II) have a medium to high risk tolerance and primarily cognitive biases. Active Accumulators (AA) have a high-risk tolerance and primarily emotional biases. Also, the next category in my CFA level 3 study list is Individual Investors.
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |