Asked by Michelle Carnes on Jun 14, 2024
Verified
Mike is a stock broker and financial planner. Phil is one of Mike's clients. Phil prefers to meet with Mike just once a year to review his investment portfolio. At their most recent meeting, Phil stated he believes the stock market is going to decline in value over the next six months. Thus, Phil instructed Mike to sell every stock he owns that is currently worth more than what he paid to purchase it. Phil also instructed Mike to retain any stock that would create a capital loss if sold. Phil is displaying the behavior known as:
A) Over-confidence.
B) Arbitrage theory.
C) The disposition effect.
D) The house money effect.
E) A confirmation bias.
Disposition Effect
A phenomenon in behavioral finance where investors are more likely to sell assets that have increased in value, rather than those that have decreased.
Stock Broker
A professional intermediary who buys and sells shares on behalf of clients in exchange for a commission.
Capital Loss
A decrease in the value of an investment or asset compared to its purchase price, realized when the asset is sold.
- Elucidate the role of cognitive and emotional biases in the determination of investment decisions.
- Examine the ramifications of diverse cognitive fallacies on investment and financial planning.
Verified Answer
JL
Jeddah Lyn GulaneJun 17, 2024
Final Answer :
C
Explanation :
Phil's behavior of preferring to sell stocks that have gained value while holding onto those that would result in a loss is indicative of the disposition effect. This phenomenon describes the tendency of investors to sell assets that have increased in value, but hold onto assets that have decreased in value.
Learning Objectives
- Elucidate the role of cognitive and emotional biases in the determination of investment decisions.
- Examine the ramifications of diverse cognitive fallacies on investment and financial planning.