Question

You’ve lost money on a particular stock for the past three years. Thus, you believes the stock will have a high positive rate of return this year because earning a good return is long overdue. This assumption is best described as the:

1-fourth wave.

2-gambler's fallacy.

3-house money effect.

Massive gains in stocks like Facebook, Amazon, Apple and Google over the last few years led investors to buy up shares of most new tech IPOs such Twitter, Snap, GoPro and FitBit. The investors who bought these new IPOs are likely suffering from:

I. Availability heuristic/bias

II. Representativeness bias

III. Overconfidence

IV. Affect heuristic

1-I and II only

2-I, III and IV

3-I and III only

Answer 1

The assumption above best described as gambler's fallacy.

GAMBLER'S FALLACY

It is also known as Monte Carlo Fallacy, the gamblers fallacy occurs when an individual erroneously believes that a certain random event is less likely or more likely, given a previous event or a series of events. This line of thinking is incorrect, since past events do not change the probablity that certain events will occur in the future.

In our case we have lost money on a particular stock for the last three years and we believe that this year the stock will have a high positive rate of return. So this assumption is better suitable for Gambler's Fallacy.

In this case the investors who bought these new IPOs are likely suffering from the following;

1. Availability heuristic/bias

In this Investors will make judgement of stocks based on having heared about them recently in the news and find that they are making massive gain in stocks for past years.

2.Representativeness bias

When an investor automatically assume that good companies make good investments. A company may be excellent at their own business but, a poor judge of other business. In our case we are assuming that new tech IPOs such Twitter, Snap, GoPro and FitBit will give same result like Facebook, Amazon, Apple and Google . But this may not be the case.