Question

Describe a financial mistake you have made: A) Explain how heuristics, biases, and/or other human tendencies...

Describe a financial mistake you have made:

A) Explain how heuristics, biases, and/or other human tendencies might have contributed to this mistake.

B) Describe how heuristics, biases, and other human tendencies perhaps have instead been exploited to help you or people like you avoid this type of mistake.

Homework Answers

Answer #1

A) A heuristic is mental shortcut that is applied to take decision in complex situation where some aspect is taken into account while other are left out. Though it result in quick decision making , It may result into irrational and imprudent decision
I bought a share 'X' whose price started to decline but I did not sold it early in the hope that it will rise again and lost huge amount of money, as I applied the heuristic which is termed as dispositional effect.
Disposition effect refers to the tendency of investor of holding on to losing stocks too long and selling stocks that have appreciated in price since purchase too early.


B) There is a representative Bias/Heuristic that is applied which refers to tendency of buying a share whose price start to rise recently and selling it when it starts to dcline. This avoids the thought on long term flow or movement. If I would have followed this heuristic , I would have sold my shares when it started to decline rather than holding it for long .

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