Behavioral Finance - Study Material with Solved Assignments

Running head: BEHAVIORAL FINANCE
BEHAVIORAL FINANCE
Name of the Student
Name of the University
Author Note

1
BEHAVIORAL FINANCE
Table of Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................2
Answer 3:...................................................................................................................................4
Answer 4:...................................................................................................................................4
Answer 5:...................................................................................................................................7
Answer 6:...................................................................................................................................7
References..................................................................................................................................9

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BEHAVIORAL FINANCE
Answer 1:
a. The four-fold pattern can be explained through an expected value which is used for
investment decision to get an average of every potential outcome, which is biased by
its probability (Stefánsson and Bradley 2017). Sometimes, this concept is not
applicable in every possible scenario. If the percentage of probability moves from
zero to five, it can be taken as a possibility effect which will cause the unlikely
outcomes to be weighted than they are.
b. There is a possibility effect in buying both insurance and lottery tickets as there is a
low probability effect, and there is hope for large gains.
Answer 2:
a.
A person has the following utility function
Utility=w0.5 if w ≥ 0
¿− (|w|)0.5 , w< 0
For w ≥ 0,
U' ( w ) = 1
2 w0.5 > 0
U (w) =- {1} over {4w sqrt {w}} <
For w <0
U' ( w ) = −1
2 w0.5 < 0