Question

Question 1

1.1) Differentiate between the following concepts / terms

a. Momentum and reversal

b. Utility functions and expected utility

c. Prospect and probability distribution

d. Risk aversion, risking seeking, and risk neutrality

1.2)Differentiate between the following terms / concepts: (5 marks each – 20 marks)

-Implicit learning and practice

-Practical knowledge and tacit knowledge

-Expertise and ability

-. Brain functions and the brain part

1.3) Discuss the merits of the following statement: Inside directors should constitute the majority of a corporate board because insiders have superior understanding of the firm’s business and operations

1.4) The fact that risk and uncertainty are experienced differently might matter in times of financial crisis. Discuss

1.5) What is the difference between a Ponzi scheme and an asset price bubble

1.6) Studies suggest that moral rules play an important, but context-sensitive role in moral cognition, and offer an account of when emotional reactions to perceived moral violations receive less weight than consideration of costs and benefits in moral judgement and decision making. Discuss

Answer 1

1.1)

a). Momentum

Momentum is the property that a moving object has due to its mass and its motion. But in economics momentum mean Momentum Trading. Momentum trading is a technique in which traders buy and sell according to the strength of recent price trends.

Momentum traders are less concerned with buying at bottoms and selling at tops instead, they make moves based on a price trend after a stock has clearly passed a resistance point, then sell or short that stock when they have achieved a profit.

Strategy of momentum traders is to take advantage of short-term price action in a stock. Whereas a swing trader may hold a stock for days or weeks, a momentum day trader will generally buy and sell a stock within the same day. Finding ideal trading candidates is of paramount importance

Reversal

Reversal is an act or the process of reversing. But in economic reversal means reversal in trade strategy.

It Stop and trades  order, sometimes called a SAR, is a type of stop-loss order that exits the current trade you're involved in and either simultaneously or immediately thereafter enters a new trade in the opposite direction.

Reversal trading system is primarily a short-term system, but it can be adapted to suit for long term strategy.

b). Utility Function

Utility Function has been introduced by Alfred Marshall.

The Law dimnishsing of Marginal utility has been introduced to understand the concept.

It explains when a person goes on consuming any commodity the additional unit derived from the additional unit goes on dimnishing the common behaviour of consumer.

Utility Function is a mathematical function which ranks alternatives according to their utility to an individual.

Expected Utliity

Expected Utility Theory (EUT) states that the decision maker chooses
between risky or uncertain prospects by comparing their expected utility values, i.e.,the weighted sums obtained by adding the utility values of outcomes multiplied by their respective probabilities.

This theory is used as a tool for analyzing situations where individuals must make a decision without knowing which outcomes may result from that decision, i.e, decision making under uncertainty.

This theory has played an important role in the study of economic behaviour, criticisms have been raised concerning its application to contexts of choice in business and economics.

c). Prospect

Prospect refers to possible or likely for the future, its a thought about what may or will happen in the future.

Prospect is for looking forward.

Eg. The prospect of a recession may lead investors to pull their money out of the stock market. Graduates of a good law school usually have excellent prospects for finding employment.

Prospect has given significant gifts to other organizations that have similar or complementary missions to yours, making that person a stronger prospect for you.

Probability Distribution

Probability distribution is a table or an equation that links each outcome of a statistical experiment with its probability of occurrence.

It refers to a function of a discrete variable whose integral over any interval is the probability that the variate specified by it will lie within that interval.

Probability Distribution is used as to measure that some event (in a set of possible events) will actually occur. The set of possible events might be finite and therefore be termed a discrete random variable, or infinite and constitute a continuous random variable.

There are Two Probability Distribution

1) Discrete Probability Distribution.

2) Normal Probability Distribution