1. During the last five years, your instructor has discussed the emerging field of behavioral finance with many colleagues. The most common reaction has been for those colleagues to smile and say, "Behavioral finance? That's an oxymoron." Oxymoron is defined as a combination of contradictory or incongruous words (e.g. cruel kindness). Explain this reaction using a) the concept of paradigm and b) attributes of the behavioral and rational paradigms.
a) According to the concept of a paradigm, someone in finance would operate on a set of principles that their work is based upon. It is the method by which they analyze their data. Under this philosophy the statement is considered an …show more content…
a) According to Kuhn, scientists are influenced by leading people in their field. This creates a bias as they often use this to influence their theories, etc. Scientific experimentation continues in a path that follows from one scientist to the next until the a new paradigm is introduced or when there is a radical change in the thinking at the time. This could happen with the death of a scientist or leading mind, as Thaler hypothesizes.
4. In a study of portfolio allocation decisions, Moore, Kurtsberg, Fox, and Bazerman had 80 business students make decisions in a computer-based, mutual-fund-investing simulation. Each student performed the simulation by him/herself. The goal was to better understand why investors spend so much time and money on actively managed mutual funds despite the majority of those funds being outperformed by passively managed index funds (at least in recent years). The researchers hypothesized that the illusion of control would lead students to overestimate their future portfolio returns from actively selecting mutual funds and that anchoring and adjustment would influence investment decisions.