This quiz works best with JavaScript enabled. Home > Finance Theory > Behavioral Finance > Behavioral Finance – Quiz 1 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Behavioral Finance Quiz 1 (20 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. Who created prospect theory? A) Barberis and Thaler. B) Shleifer. C) Kahneman and Tversky. D) Schiller. Show Answer Correct Answer: C) Kahneman and Tversky. 2. One important implication of the efficient market hypothesis is that: A) Investors can make profits by engaging in day trading. B) Investors should hold a diversified portfolio and avoid active trading. C) Investors should actively review their portfolio to achieve the highest profits. D) All of the above. Show Answer Correct Answer: B) Investors should hold a diversified portfolio and avoid active trading. 3. Behavioral finance A) Is as a subject that brings together economic insights about preferences and decision-making with broader principles of behaviour from a range of other social, behavioural and biological sciences. B) The influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. Show Answer Correct Answer: B) The influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. 4. A seller includes an option on a menu solely to make the most expensive option look more appealing by comparison. This seller is taking advantage of ..... A) The sunk cost fallacy. B) Loss aversion. C) The decoy effect. D) Left digit bias. E) Social norms. Show Answer Correct Answer: C) The decoy effect. 5. Firm A wants to spin off its wholly owned subsidiary B. Stockholders of A will receive 1.5 shares of B per share of A. After the IPO of B we observe the following prices:A:$ 80 and B:$ 70What is the correct "stub value" ? A) 10. B) -50. C) 50. D) -25. Show Answer Correct Answer: D) -25. 6. Evaluation biases affect the [ ..... ] of a decision problem. A) Input. B) Valuation method. C) Judged probabilities. D) None of above. Show Answer Correct Answer: B) Valuation method. 7. Making decisions based on arbitrary (i.e. random) reference points is called ..... A) Asymmetric dominance. B) The endowment effect. C) Left digit bias. D) Anchoring. E) Arbitration. Show Answer Correct Answer: D) Anchoring. 8. Which of the following statements best defines Use Value? A) What you can obtain for an item at a later time. B) How helpful an item is given the context of a current situation. C) How well something satisfies a person's wants or needs. D) What we lose by giving up the other provided choice. Show Answer Correct Answer: B) How helpful an item is given the context of a current situation. 9. Positive serial correlation in returns is reported over the medium term. This is called ..... A) Representativeness. B) Anchoring. C) Momentum. D) Reversal. Show Answer Correct Answer: C) Momentum. 10. If investors initially anchor on past earnings, they ..... to earnings news. Later, if they believe the observed high (or low) earnings will continue into the future, they ..... A) Overreact, underreact. B) Underreact, overreact. C) Underreact, underreact again. D) Overreact, overreact again. Show Answer Correct Answer: B) Underreact, overreact. 11. What is a Plain Folks advertisement? A) A public figure or celebrity promoting a product. B) Having people like you speaking on behalf of a product. C) Making huge predictions based on a few small facts. D) Use of virtue words/opposite of name calling. Show Answer Correct Answer: B) Having people like you speaking on behalf of a product. 12. What is the belief that a small sample of outcomes accurately represents the long-run distribution of outcomes? A) Law of small numbers. B) Survivorship bias. C) False consensus. D) Anchoring and adjustment. Show Answer Correct Answer: A) Law of small numbers. 13. The ability to affect someone else's behavior A) Influence. B) Financial literacy. C) Opportunity cost. D) Credit. Show Answer Correct Answer: A) Influence. 14. The M in SMART goals stands for A) Might. B) Measurable. C) Magical. D) Meaningful. Show Answer Correct Answer: B) Measurable. 15. Preferring one gender over another or assuming that one gender is better A) Gender Bias. B) Weight Bias. Show Answer Correct Answer: A) Gender Bias. 16. Using graphs, charts or statistics that sound precise-yet even experts find the numbers suspect: A) Plain Folks. B) Bandwagon. C) False Statistics. D) Freemium. Show Answer Correct Answer: C) False Statistics. 17. (In short) what is described by the "Information Paradox" of Grossmann and Stiglitz (1980)? A) If all information is reflected in prices, nobody had an interest in producing information. B) If all information is reflected in prices, nobody would use technical analysis. C) If all information is reflected in prices, nobody would trade. D) None of above. Show Answer Correct Answer: A) If all information is reflected in prices, nobody had an interest in producing information. 18. What is loss aversion and how is it likely to be costly? A) The reliance on stereotypes or limited samples to form opinions. B) The tendency to focus on avoiding short-term losses, even at the expense of long-term gains. C) The tendency to avoid making a decision because of fear of suboptimal outcomes. D) The belief that other people are thinking the same thing you are thinking. Show Answer Correct Answer: C) The tendency to avoid making a decision because of fear of suboptimal outcomes. 19. In class you learned about mispricings resulting from spin-offs. Which possible reason(s) can explain this phenomenon? A) Currency Risk. B) Taxation. C) Noise Trader Risk. D) Liquidity. Show Answer Correct Answer: C) Noise Trader Risk. 20. What is the phenomenon where investors tend to sell winning stocks too early and hold onto losing stocks for too long? A) Disposition effect. B) Confirmation bias. C) Recency bias. D) Anchoring and adjustment. Show Answer Correct Answer: A) Disposition effect. Next →Related QuizzesFinance Theory QuizzesBehavioral Finance Quiz 2Behavioral Finance Quiz 3Behavioral Finance Quiz 4Behavioral Finance Quiz 5Behavioral Finance Quiz 6Behavioral Finance Quiz 7Behavioral Finance Quiz 8Behavioral Finance Quiz 9Behavioral Finance Quiz 10 🏠 Back to Homepage 📘 Download PDF Books 📕 Premium PDF Books