LOS d: Define behavioral finance and describe prospect theory, over-confidence bias, confirmation bias, and escalation bias.

Q1. The tendency to commit additional funds to a position that has decreased in value is known in behavioral finance as:

A)   confirmation bias.

B)   overconfidence bias.

C)   escalation bias.

Q2. In behavioral finance, the tendency to seek out good news and ignore bad news is called:

A)   confirmation bias.

B)   escalation bias.

C)   overconfidence bias.

Q3. With respect to behavioral finance, the tendency to place too much faith in an earnings forecast is known as:

A)   overconfidence bias.

B)   anchoring.

C)   confirmation bias.

LOS d: Define behavioral finance and describe prospect theory, over-confidence bias, confirmation bias, and escalation bias.fficeffice" />

Q1. The tendency to commit additional funds to a position that has decreased in value is known in behavioral finance as:

A)   confirmation bias.

B)   overconfidence bias.

C)   escalation bias.

Correct answer is C)

The tendency to commit additional funds to a position that is decreasing in value falls under the heading of escalation bias in the context of behavioral finance.

Q2. In behavioral finance, the tendency to seek out good news and ignore bad news is called:

A)   confirmation bias.

B)   escalation bias.

C)   overconfidence bias.

Correct answer is A)

The tendency to seek out good news and ignore bad news falls under the heading of confirmation bias in the context of behavioral finance.

Q3. With respect to behavioral finance, the tendency to place too much faith in an earnings forecast is known as:

A)   overconfidence bias.

B)   anchoring.

C)   confirmation bias.

Correct answer is A)

The tendency to place too much faith in an earnings forecast falls under the heading of overconfidence bias in the context of behavioral finance.

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