Question

Choose two of the following concepts discussed in this week’s materials. • Anchoring • Mental accounting • Herd behavior • Prospect theory Define each in your own words and explain how each could apply to your personal financial and credit decisions. Your entire response should be at least 100 words.

Answer 1

Two topics chosen are: Mental anchoring and herd behavior

While making personal financial and credit decisions, people tend to go by these two concepts.

In case of mental accounting, one prefers to keep money divided in multiple accounts based on their time of use. For eg i decide to keep my money in different accounts, one for routine spending, one for future studies and one for marriage.

Similarly, herd mentality refers to people going one after the other to make investment decisions although without any mutual concensus. This generally happens when people see some people investing in a certain area or property and they start thinking that i will give them high returns and then they start doing it too.