Scenario #3 Wendy is watching CNBC during a day in which the stock market dropped, and the flashes of red on the screen, along with the alarm bells the station keeps ringing, are driving her to near insanity. Even though her advisor reminds her that the stock market will be volatile-this is why it earns higher returns than other assets, she can’t seem to avoid the news. She is glued to the everominous (this day) “doom and gloom” advice on her TV. It is causing her angst, as well as a tendency to want to sell everything she own. 1) What behavior/bias is present? 2) Why is this behavior detrimental? 3) What could have been done differently, or what could be done differently next time to avoid this result?
This is overreaction towards the decline in the market. It depicts high degree of loss aversion and fear of losing all investment by judging the short term changes in the market.
This reaction is detrimental because the price decline may be short term. The prices rise and fall everyday and she needs to watch the trends before deciding to sell the stocks.
She should wait and watch. Also study future prospects and news as regards her particular stocks. The decision should be taken for the stocks in which she invested although she should keep watching the activity in the stock market.
Scenario #3 Wendy is watching CNBC during a day in which the stock market dropped, and...