Choose two (2) Psychological Biases, elaborate them in your own understanding and give examples. You can state

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Question:

Choose two (2) Psychological Biases, elaborate them in your own understanding and give examples. You can state your own experience as an example if possible. Make sure your example is related to finance.

2. Do you consider the Heuristic approach as a positive technique in making financial decisions?

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Psychological Biases

a. Mental Accounting - It is also called Psychological Accounting. This deals with the ordinary way of categorizing and/or separating money into different accounts. Individuals tend to immediately invest and/spend money for a particular thing, without identifying other expenses that are more important.

b. Herd Behavior - This is simply the behavior of a whole group. This occurs when people act uniquely from one another and make different decisions. In stock market, investors tend to rally or argue because of their different decisions and choices.

c. Emotional Gap - This occurs when people with anger or anxiety immediately make decisions. People with this gap do not make choices logically or rationally.

d. Loss aversion - This refers to an investor's possibility to avoid financial losses. Individuals have fear to invest because they focus on financial risks, not on financial gains.

e. Hindsight Bias - This occurs when an individual always claims that he is right. With this claim, some may mistakenly believe that he can predict an outcome.

Heuristics - This is also called the Heuristic Technique. In behavioral finance, this is a method of finding solutions of problems in a rapid way. Using this approach, investors and financial managers quickly decide without hesitation to immediately come up with a solution.