Question

5. Explain how behavioral biases of overconfidence, regret, representativeness, and familiarity can affect investment behavior of investors of Baldwin Inc.

Answer 1

1) Overconfidence bias occurs when market participants overestimate their own intuitive ability or reasoning. Consequences of overconfidence bias of investors on Baldwin INC. is underestimation of risk and overestimation of return. This will cause investors to buy more shares.

2) Regret bias:- This bias occurs when market participants do nothing out of fear that action would go wrong. This will make the investors scared and they will invest less in the company.

3) Representativeness bias :- According to this bias , it is based on a belief that the past will persist and the new information will be classified on the basis of past experience or classification. This bias will affect the behaviour of the investors in both positive or negative way, depending on the experience they had in past regarding a situation or information. This will have a dicey effect on the company, and the investors will also show dicey behaviour because investors will not do thorough analysis due to this bias.

4) Familiarity bias :- Familiarity bias occurs when investors buy the familiar options which they have heard or know about, even if they don't provide favourable outcome. This bias will make the investors behaviour more positive towards the company and increase its trading.