Question

Choose two of the following concepts discussed in this week’s materials. • Anchoring • Mental accounting • Herd behavior • Prospect theory Define each in your own words and explain how each could apply to your personal financial and credit decisions. Your entire response should be at least 100 words.

Answer 1

Two topics chosen are:

Mental accounting

Herd behavior

Mental accounting refers to the tendency of people to keep their money in separate accounts based on their source of generation and their use. For eg in order to keep my money diversified, I will keep my salary account different from my account i have for free lancing work or i will maintain separate accounts having a minimum balance in each. This helps keeping money at different places and make money from different returns and investments.

Herd behavior refers to the tendency of people to move collectively in one direction without any mutual concensus.

In personal financial decisions, this generally happens when people are not much well informed and go one after the other. For eg i i see a friend of mine investing in real estate, I will also go after it and so will my other friends, so though we didnt decide on doing this together, it ended up being happening. This is because people think that others are doing so because it is giving them good returns and so they also want to do it.