Question

An investor owns 1,000 shares of IMAX Corporation. This individual thinks the company has a huge growing potential and decides not to sell any of the holdings. Explain the underlying behavior finance concepts involved and how they drive the investment decision making.

Answer 1

Behavior finance concepts state that psychological influences and biases affect the financial behaviors of investors. These influences can explain the market anomalies in the stock market such as a sudden rise or fall in a stock price.

Biases can occur for a variety of reasons. Biases can usually be classified into one of five key concepts.

1. Mental accounting - it refers to people allocating money for specific reasons.
2. Herd behavior - It means to mimic the behavior of the majority of investors.
3. Emotional gap - It refers to decisions made in extreme emotions such as anger, excitement, or anxiety.
4. Anchoring - It means to attach a spending level to a certain reference like spending consistently based on a budget level
5. Self-attribution - It refers to make choices based on confidence in self-based knowledge. The person tends to rank their knowledge higher than others.

The behavior finance concept involved in not selling the shares because the person thinks the price will rise is Self-attribution.