1. The director of research instructed 40 sell-side analysts:
1) to provide a bear case (or low estimate) for Company X’s sales next fiscal period,
2) to provide a bull case (or high estimate)for Company X’s sales next fiscal period, and
3) to be 95% sure CompanyX’s sales next fiscal period will fall within the range of the analyst’s low estimate and high estimate.
The following year, Company X’s actual sales figure confirmed only 28 of 40 analysts were able toexecute each of their director’s three instructions. A company representative then conducted each analyst’s performance evaluation. During the evaluations, the 12 analysts who failed to predict Company X’s sales indicated they felt bad about their estimates despite their thorough due diligence in researching Company X. Disregarding their feelings, the representative proceeded to fire the 12 analysts who failed to accurately predict Company X’s sales. In behavioral finance, which of the following best describes the cause of the error made by the analysts?
A. Overconfidence bias
B. Prospect theory
C. Representativeness bias
D. Regret bias
E. Confirmation bias
2. Advertising is expensive. A company will only invest in an advertising campaign if management believes increased revenue from the advertising campaign will more than offset the expenses. To help determine how to advertise, management spends a great deal of time trying to understand consumer behavior. Consumers know that color ads cost more to print. Accordingly, empirical studies show that color ads make consumers believe a product is of higher quality and that consumers are willing to pay a premium for the product. On the other hand, black and white ads make consumers believe the product is of inferior quality and the company often cannot recoup the advertising dollars spent.
In behavioral finance, by equating higher advertising cost to higher product quality, the consumers are exhibiting which of the following:
A. Overconfidence bias
B. Prospect theory
C. Representativeness bias
D. Regret bias
E. Confirmation bias
3. The phenomenon where losses have more emotional impact than gains is best explained by ____.
A. Overconfidence bias
B. Prospect theory
C. Representativeness bias
D. Regret bias
E. Confirmation bias