Finance Research

Discussion

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HAN

I chose an example of the overconfidence bias which demonstrates people's tendency to overestimate their skills and talent which in turn causes them to underestimate the risks. A severe case of overconfidence can be seen in the failure of space missions. In both The Challenger and Columbia space missions, which failed and resulted in many deaths, there were malfunctions recognized by the experts prior to launch. NASA management ignored the malfunctions because they had unrealistic optimism about the success of the mission and their skills.

Overconfidence bias can also be seen when investing in the stock market. One way that overconfidence can be avoided when it involves the stock market is to think of all possible consequences. For example, if you are considering spending a giant sum of money on what you think is "the next best stock", it's best to calculate what would happen to your money if the stock tanked. This is a great way for you to visually see the risk before making a decision.

shu

In my view, A heuristic is a mental shortcut that allows an individual to make a decision, pass judgment, or solve a problem quickly and with minimal mental effort. While heuristics can reduce the burden of decision making and free up limited cognitive resources, they can also be costly when they lead individuals to miss critical information or act on unjust biases.

As humans move throughout the world, they must process large amounts of information and make many choices with limited amounts of time. When information is missing, or an immediate decision is necessary, heuristics act as “rules of thumb” that guide behavior down the most efficient pathway. Heuristics are not unique to humans; animals use heuristics that, though less complex, also serve to simplify decision making and reduce cognitive load.

One of the stories that's making the rounds right now concerns Adam Orth, a (former) Creative Director at Microsoft who caused a ruckus by cramming his foot in his Twittermouth. He did so while weighing in on a potential "always on, always connected to the Internet" nature of Microsoft's next Xbox console. The gist of his high crimes is that he supposedly looked down on those complaining about such a console feature, downplaying the significance of places where Internet connectivity is reliable and/or affordable.

Setting aside the actual rumor, what I find interesting about this situation is a certain cognitive bias that seems to be on display in these comments, as well as in many of the surrounding debates I've seen on the 'net. Orthy's estimation of the number of people who have stable Internet connections and who should thus "#dealwithit" is probably influenced by the availability heuristic. Or rather, the Unavailability heuristic.

We can improve the decision by increasing the awareness for heuristics through Medical Training, Research into Medical Decision Making.

Module 6 Discussion

In this module, we learned the following topics:

Chapter 14 – Predictability of Stock Prices

Chapter 15 – Fama French and Mean Reversion

Based on your readings and participating in the stock market game in the past few weeks, how predictable would you say your chosen stocks are?

How are your stock doing? Did you expect it to do so well? Not so well? Not moving much?

Any surprise news that changed the trajectory of your picks?