1. Behavioral Finance
Economics 437

2. Exam: Thursday, March 2nd
In Wilson Auditorium, unless arranged and approved in advance, 9:30 -10:45
Covers all lectures (and readings identified in prior lecture)
Main Emphasis
EMH: Malkiel, Shiller, Shleifer, Fama, Black
Noise Trading: Shleifer, Chapter Two
Expected Utility
Not much on anomalies
Do not bring anything to exam except something to write with (no notes, notebooks, books, etc.)

3. Exam Layout Similar to 4340 layout
First question: a series of identifications (8 to 12 of them), requiring short, to-the-point, answers
Five to Seven other questions that are short answer, essay questions or possibly problems
Excess verbiage in answers is not rewarded

4. Imagine that one in every thousand athletes use steroids
Imagine that one in every thousand athletes use steroids. Imagine also that the test for steroids has a 5 % false positive rate. If a particular athlete tested positive for steroids what is the probability that that athlete was a steroid user
[0.001]
[0.020]
[0.65]
[0.95]

5. A Dilemna
US is preparing for the outbreak of an unusual foreign disease which is expected to kill 600 people
Program A: 200 people will be saved
Program B: 1/3 probability that 600 will be saved; 2/3 probability that no one will be saved

6. Regression to the mean
Highly intelligent females tend to marry men who are less intelligent than they are
The correlation between the intelligence scores of spouses is less than perfect (and men and women do not differ in intelligence on average)

7. Vagueness -- Game 1 Consider an Urn Containing: ½ red balls
½ green balls
If you can pick a red ball you win $ 100, otherwise zero

8. Vagueness -- Game 2 Consider an Urn Containing red and green balls,
But we have no idea how many
of each
If you can pick a red ball you win $ 100, otherwise zero

9. Insurance Distortions
Flight Insurance …. $ 100,000 coverage in case of
Terrorism $ 7.42
Anything but terrorism $9.00
Anything $ 7.44

10. Buy me a beer!
From a resort
From a small country town store

11. Fairness and “Reference Points”
Shortage of cars develops
Dealer raises prices $ 200 above list
71 % unfair
Dealer has been selling these cars at a discount of $ 200 below list price. He now eliminates the discount
Only 42 % unfair

12. Cutting wages
A small co employs several people. Workers’ incomes have been about average for the community. Business is slow. Owners reduce the workers’ wages by 10 percent for the year
61 % unfair
A small co employs several people. The workers have been receiving a 10% bonus each year. Business is slow. Owners eliminate the bonus for the year.
20 % unfair

13. Tipping
Survey
A restaurant you visit frequently, bill is $ 10, what is the tip?
$ 1.28 on average
A restaurant in another city that you do not intend to return to
$ 1.27 on average

14. Another Example Can of insecticide costs $ 10 Same can but has no risk
Current risk level 15 out of 10,000 (injured)
What would you pay to eliminate the risk
Result of survey $ 3.78
Same can but has no risk
What price reduction would be okay to have a 1 in 10,000 risk?
77 % said they would refuse to buy the product at any price if the risk were increased

15. Anchoring (the bag of marbles)
50 red; 50 white
Probability of drawing a red marble
90 red; 10 white
Probability of drawing (with replacement) 7 red marbles in a row

16. Anchoring (the bag of marbles)
50 red; 50 white 50%
Probability of drawing a red marble
90 red; 10 white 48%
Probability of drawing (with replacement) 7 red marbles in a row
90 red; 10 white 52%
Probability of drawing (with replacement) at least one white marble in 7 tries

17. Going to the UVA Basketball Game
Paid $ 200 for a courtside ticket
As you try to enter, you realize you have lost the ticket
Someone offers to sell you another ticket for $ 200….would you buy it?
You are on the way to the basketball game and have decided to pay $ 200 for a courtside ticket
As you try to enter, you realize that you have lost two hundred dollar bills, but still have several left and can buy the ticket
Would you still buy the ticket?

18. Another Dilemna Program C: If adopted 400 people will die
Program D: 1/3 probability that no one will die and 2/3 probability that 600 people will die

19. Sunk Costs
A man joins a tennis club and pays a $ 3000 yearly membership fee. After two weeks of playing, he develops a tennis elbow
He continues to play (in pain) saying: “I don’t want to waste the $ 300”

20. Naïve Diversification
Four Choices:
Three Bond Funds
One Stock Fund
Put ¼ in each
Four Other Choices
Three Stock Funds
One Bond Fund

21. Perceptions of “Randomness” - an example of “representativeness”
In a population of families with exactly six children, which sequence of births is more likely:
B B B G G G
G B B G B G
School A has 65 % boys, School B has 45 % boys
You enter a class at random with 55 % boys
Is this class more likely from School A or School B?

22. 20 marbles, randomly divided among five children
I II
Alan
Ben
Carl
Dan Ed
In many rounds of random assignment, which of these results is more likely?

23. The End