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3. Discuss your reaction for the following framing bias scenarios Question 1: Suppose that you have the opportunity to invest in a mutual fund called MicroTrend. Over the past 10 years, MicroTrend has had an average annual return of 6 percent, with a standard deviation of 10 percent. So if MicroTrend continues to perform consistently, you can expect two-thirds of all returns to fall between -4 percent and 16 percent. How comfortable would you feel about investing in MicroTrend? a. Comfortable b. Somewhat comfortable c. Uncomfortable Question 2: Suppose that you have the opportunity to invest in a fund called MicroTrend. Over the past 10 years, MicroTrend has had an average annual return of 6 percent, with a standard deviation of 10 percent. So if MicroTrend continues to perform consistently, you can expect 95 percent of all returns to fall between -14 percent and 26 percent. How comfortable would you feel about investing in MicroTrend? a. Comfortable b. Somewhat comfortable c. Uncomfortable 2. Discuss your reaction for the following anchoring bias scenarios Suppose you have decided to sell your house and downsize by acquiring a townhouse that you have been eyeing for several years. You do not feel extreme urgency in selling your house, but the associated taxes are eating into your monthly cash flow, and you want to unload the property as soon as possible. Your real estate agent, whom you have known for many years, prices your home at $900,000-you are shocked. You paid $250,000 for the home only 15 years ago, and the $900,000 figure is almost too thrilling to believe. You place the house on the market and wait a few months, but you don't receive any nibbles. One day, your real estate agent calls, suggesting that the two of you meet right away. When he arrives, he tells you that PharmaGrowth, a company that moved into town eight years ago in conjunction with its much-publicized initial public offering (IPO), has just declared Chapter 11 bankruptcy. Now, 7,500 people are out of work. Your agent has been in meetings all week with his colleagues, and together they estimate that local real estate prices have taken a hit of about 10 percent across the board. Your agent tells you that you must decide the price at which you want to list your home, based on this new information. You tell him that you will think it over and get back to him shortly. Question: Assume your house is at the mean in terms of quality and salability. What is your likeliest course of action? 1. You decide to keep your home on the market for $900,000. 2. You decide to lower your price by 5 percent, and ask $855,000. 3. You decide to lower your price by 10 percent, and ask $810,000. 4. You decide to lower your price to $800,000 because you want to be sure that you will get a bid on the house. Reading Assignment Class 8 1. Discuss your reaction for the following mental accounting scenarios Question 3-Part A: Suppose that you've taken half a day off work to shop for a new, ride-on lawn mower. You have a big yard, and trimming it with your current, push-propelled mower simply takes too long. You have been eyeing the Model A300, which offers all the features you require at a cost of \$2,000. As luck would have it, you won $500 the previous evening playing bingo at your local Rotary Club. When you arrive at the lawn mower shop, you notice that they also stock Model A305, which has some fancy, desirable new options. This premium model costs $2,250. Considering the previous night's winnings, will you indulge yourself by purchasing the A305? a. yes. b. no. Question 3-Part B: Suppose that your budget and your needs regarding the lawn mower are exactly as described in Question 3A and that again you've taken half a day off work to go buy the simpler-butsufficient A300. However, imagine that while you've not been especially lucky at bingo, you do discover a $500 check in your jacket pocket. You recall that the money was a gift from your mother last year, something to be "put away for a rainy day." You apparently forgot that you put it in your jacket and have just come up on it. When you arrive at the lawn mower shop, you again notice the pricier A305 for $2,250, with its coveted, innovative mowing features. Considering the check you just found, will you go ahead and purchase the A305? a. yes. b. no