Short Question. Explain Each Question Clearly With More Than 4 Sentences Essay Example

A bias according to which people have a habit of accepting as true is “the law of small numbers”; that bias is a tendency to make assumptions based on small quantities of information. For instance, if a hedge fund executive had successful fiscal results for two years in a row, a lot of people would think that the hedge fund executive is himself above average, however this assumption is not considered valid, stemming from such a small number of years. Another example of this biased assumption is when you think you can guess if the next coin toss will be heads or tails, when the last three tosses for example was heads.
In economic science and decision theory, loss aversion talks about one’s tendency to intensely favor avoiding losses to obtaining gains. A number of studies advocates to the fact that losses can be two times as strong, in psychological terms as winnings. This phenomenon can cause risk aversion when individuals estimate a result that comprises of comparable gains and losses considering that individuals favor losses avoidance to making gains. Examples of this singularity are found in prices of common goods, in relationships, in politics and everyday life decisions in general.
We ought to have in mind that, if a transaction has two possible results win or lose, this question can be very crucial to this calculation: one would rather benefit from a $10 discount, or dodge a $10 surcharge? If we formulate the question in a different manner, with the exact same numbers, for example, if one would prefer a loss of $10 with 100% probability or a loss of $20 with 50% probability, most people prefer the second option, although the mean loss is identical and so we notice a drastic change in consumer behavior. Although old-style economists think of this effect to be totally illogical, it has proven to be very significant to the area of marketing.
The disposition effect is an irregularity revealed in behavioral finance. It describes the inclination of investors in selling shares with increased price, while holding on to shares that have plummeted. Investors do not seem keen to identify losses but are eager to identify gains. This behavior is not rational, as the future performance of the share is not correlated with its initial price while stockholders ought to be more inclined to sell “losers” so they can benefit from possible tax reductions. The disposition effect is connected with loss aversion.
The endowment bias or the endowment effect is, in behavioral economics, the assumption that one assigns greater value goods just because he is in possession of them. This is demonstrated by the opinion that individuals are eager to give a greater amount to hold on to a commodity they own than to acquire a commodity not owned by them. An example of the endowment comes from a 1990 study in which participants were offered a mug and then the capability to sell it.
Two reasons for the economic crisis are the abatement of the before-2001 strict loaning requirements that the banks had set leading to an overflow of reckless mortgage lending in the USA America. Loans were given out to “subprime” debtors with ill-reputed credit history and who subsequently had a problem repaying them. Another reason was that the above loans were utilized in order to support securities that were more commonly known as collateralized debt obligations (CDOs). Those parts of debt were later rated from well-known credit rating agencies such as Moody’s with triple-A, meaning that they were thought to be extremely secure.
In history, downturns of the yield curve have forecasted a number of recessions in the US economy. Because of this correlation, that curve is frequently seen as a precise estimate of the critical junctures of the business cycle. A fresh example occurred in 2000 when the U.S. Treasury yield curve reversed previously to the financial crisis.
Bond markets differ from stock markets since centralized exchange system is absent. On the contrary, in the majority of the developed world countries bond are traded decentralized markets. In those markets, liquidity is delivered by dealers and other contributors. When investors buy or sell in the bond market, the other interested party to the trade is quite frequently banks that act as a dealer.
The dividend discount model is a process for estimating the price of a stock by using forecast dividends and deducting them back to present value. The notion of this is that if the price acquired from the dividend discount model is greater than what the stocks are at present trading at then the share is underrated. The problem with this model is that it involves a gigantic volume of speculation when one tries to predict future dividends. Even when the model is applied to stable, trustworthy companies, there is always the necessity to use a number of conventions about their future. The dividend discount model is subject to the proverb "garbage in, garbage out", denoting that it is only as good as the conventions it is based upon.
The winner's curse is a singularity that may present itself in auctions with asymmetry of information. It describes that in auctions the winning part will have a tendency to pay above the price it should have. The winning part may exceed the payment in those ways. First, the winning offer can exceed the price of the auctioned good such that the winning part is worse off in total standing or the price of the good is less than the buyer expected.
Some of the cons of the Initial Public Offerings (IPO’s) are that one has to supply much information to investors and regulators which can prove costly. Furthermore, there are substantial one-time costs of going public like fees to underwriters, legal fees, auditing fees, etc. and lastly the share might be underpriced. In fact most IPOs are underpriced in the primary market and hence the company does not receive as much capital as it should.
Speculative bubbles are triggered by “precipitating factors” that alter public opinion about markets or could have an instant influence on demand, and by “amplification factors” in type of price-to-price response, as noted by Shiller (2000). In considering the instance of a house bubble a number of fundamental features could impact value movements in housing markets.