Exam 1 Miscellaneous

what are some of the ideas that Annie Duke mentioned in her interview?

-her idea of "luck"
-fundamental attribution error
-being off "tilt" and how to overcome it

according to Dan Ariely, what are the four ways in which companies can create more sound reward systems?

1. change the mind set
2. document crucial assumptions
3. create a standard for good decision making
4. reward good decisions at the time they're made

what do the probabilities found at decision tree end nodes represent?

these are the probabilities that one will end up at that end node, taking into consideration the entire decision tree

how do simple financial lotteries demonstrate Prospect Theory?

the decisions we make in financial lottery situations are based off of what we begin the problem with (our reference point). if we were basing decisions off of the classic Bernoulli approach, our decisions would be based solely off of which had the higher gain/loss

when observing the framing effect, what is the "implicit" reference point?

it would be what is framed for you. for example, loss framed incentives construct the reference point of you HAVING something. a loss from this reference point (losing something) would be non ideal

what is the equity premium puzzle?

shows the difference between people's interest/investments in stock vs. bond markets. More people invest in bonds even though stocks have a much higher expected return

why is the equity premium puzzle puzzling?

it is puzzling because even though stocks do have higher risk than bonds, the risk is not great enough to outweigh the expected return. yet people still invest in bonds over stocks

a potential explanation for the equity premium puzzle:

investors are observing risks in stock vs. bond markets on a short time horizon. stocks have large fluctuations in risk/return which, when viewed over a short time horizon, can look very unattractive. but over a long time horizon, one would recognize that the overall return is very high

why does it matter how many iterations you have in a Monte Carlo simulation?

the more iterations you have, the more accurate your results will be (think Law of Large Numbers)

why is it important to draw random levels of returns for each month in a Monte Carlo simulation?

if you were to use the same one level of return for each month, estimates of stock portfolios would look similar to bond portfolios and the random draw would just compound on itself forever. the graph would be an increasing straight line and would not be representative of future predictions

how is probability weighting different from "over-estimating the probability of unlikely events"?

while probability weighting greatly effects the way we make decisions, estimating the chance of certain events occurring is just asking yourself "what is the probability of this happening?" It is unlikely that knowing that an event has a high chance of happening will change someone's risk averse decision

what is the role of System 1 in probability weighting?

system 1 has a hard time differentiating between probability. it thinks in terms of definite gains or losses

what are the pros and cons of utilizing public concern when it comes to risk management policymaking?

#NAME?

what is Annie Duke's definition of good luck?

good luck occurs when an event has a low expected value but ends up happening anyways

fundamental attribution error:

human tendency to attribute something bad happening to bad luck and something good happening to personal skill

what does "off-tilt" mean?

it means being in an emotionally out of control state due to the occurrence of a certain event and proceeding to make bad decisions because of it

how come one prevent themselves from going "off-tilt"?

we must recognize that some things are out of our control