Question

Behavioral Finance is subject

1. People's assessments of the dangers of COVID-19 appear to be wildly different from person to person. Using knowledge of Behavioral Finance and using outside material if necessary, discuss what types of biases and heuristics may be responsible for such discrepancies

Answer 1

There was various types of bias which will be observed during the crisis of covid-19, and these biases are as follows-

A. Endowment effect or loss aversion bias is also seen at the time of the coronavirus crisis when people were highly holding onto their investment even if they are losing because they are never trying to to book out on their losses and they are more focused on holding onto their losses than booking onto their gains.

B. Bandwagon effect was also visible during the times of the coronavirus when, the market crashed and people did buy because they were expecting that markets are going to crash more as there was an expectation of the impending recession and the consensus did not work and the market recovered and hit all time new highs, and investor lost the opportunity.

C. Confirmation bias was also seen during the times of the coronavirus in which investors were trying to justify the high valuations of the stocks before they crashed and they were holding onto it but when the stock crashed there still looking to hold on to it because there was a bias of getting themself confirmed at every prices

D. Recency bias- there was a high expectation of repetition of the past performance of the market as investors thought that the market is going to recover when it crashed but it continued to go down.

E. illusion of control bias was also visible because the investor's were believing that the market will be controlling itself after a certain level but it continued to go down because there was no control from any investors even after the market has fallen significantly.

These types of cognitive bias and heuristics were observed at the time of coronavirus crisis which led to a reflection of behavioral finance by large group of investors and It led to wild movement in the market.