U1L3 Finance HW

Match the following

• Confirmation bias

• The tendency to put more value on things you already own

• FOMO

• The tendency to feel anxiety/fear that an exciting or interesting event may currently be happening elsewhere, often aroused by posts seen on a social media website

• Hedonic adaptation

• The tendency to make decisions about a current situation based on what resources you have already invested in the situation

  
  

• Endowment effect

• The tendency to return to a baseline level of happiness regardless of whether you go through a positive or negative experience or event

Match the following

• Sunk Cost Fallacy

• The tendency people have to be more confident in their own abilities

• Herd mentality

• The tendency to make decisions about a current situation based on what resources you have already invested in the situation

• Loss Aversion

• The tendency to conform to the behaviors and beliefs of the people around you

• Overconfidence

• The tendency to regard losses as considerably more important than gains of comparable magnitude

Match the following

• FOMO

• Javier is a part of an online social media group that encourages investing in trending stocks. He always hears about how these stocks are performing really well and wants to invest in some of the stocks that have been mentioned in recent posts.

• Hedonic Adaptation

• Malik finds himself scrolling on social media and making small, frequent purchases for things he doesn’t really need. He likes the feeling of ordering something and getting it delivered within a few days, but then finds that he keeps coming back for more.

• Endowment effect

• Suli takes a car out for a test drive and starts to imagine herself as the new owner of the car. When she comes back to the dealership, she is so excited about the car that she is willing to pay over her budget for the car.

• Confirmation bias

• Blake’s friends are all going to a music concert. Blake hasn’t saved up enough money to buy the expensive tickets, but they are afraid they’ll miss out on the experience if they don’t go. They’re tempted to take out a personal loan to buy the tickets.

Match the following

• Overconfidence

• Grace and her friends have had a long week and have decided to treat themselves to an expensive meal. Unfortunately the food isn’t very good but Grace feels like she needs to finish her meal because she already paid for it.

• Loss Aversion

• Riley is learning about investing in their personal finance class. After learning the basics of stocks and bonds, they feel confident they can pick winning stocks and want to invest half of their savings in stocks they select.

• Herd mentality

• Naomi is considering taking a gap year after graduating high school to travel and do a coding bootcamp. However, she’s doubting her decision because most people from her high school plan to go to a 4-year university after graduating.

• Sunk Cost Fallacy

• Daniel has heard stories of how people invested in the stock market and lost lots of money when the market crashed. As a result, he’s decided he doesn’t want to invest at all since it seems so risky.

1. Which of these biases do you think people around your age experience the most? Explain.

How do you think these cognitive biases can impact someone’s personal finances?

1. In what ways can being aware of cognitive biases help us make better decisions and improve our critical thinking skills?

Which of the following is true of cognitive bias?

• 1. It is easy to recognize when cognitive biases are influencing our own decisions

• 1. There is rarely anything you can do to combat a cognitive bias’ influence

• 1. There are only a handful of cognitive biases that exist

• 1. Awareness is often the first step to overcoming the influence of a cognitive bias

  
  

2. Andrew wants to buy a specific model of a new car. He conducts research and finds many resources that highlight the benefits of that car model. Which cognitive bias might be influencing  Andrew’s decision making?

• 1. Confirmation bias

• 1. Hedonic Adaptation

• 1. The Sunk Cost Fallacy

• 1. Overconfidence

3. Mina wants to start using an investment app that all of her friends are raving about. She hasn’t done any research on the app, but she trusts her friends’ judgment. At home, Mina’s mom points out that Mina is being influenced by FOMO and herd mentality. All of the following are things Mina can do to overcome these cognitive biases EXCEPT…

• 1. Take time to reflect and identify why she is so eager to use the app

• 1. Watch a positive video about the app, download the app, and start using it that day

• 1. Ask people outside her friend group for their opinions and perspectives

• 1. Seek out reviews that talk about the disadvantages of using the app