1. Behavioral Finance
Economics 437

2. Readings for March 27 Mid-Term
Daniel Kahneman, “Thinking: Fast and Slow”
Michael Lewis, “The Undoing Project”
Burton & Shaw, Chapters 8-13

3. Early Biases Studied by K-T
Insensitive to sample size
Large hospital/small hospital
Which counties have highest cancer rates/lowest cancer rates?
Misconception of chance
“Overdue” chance outcome
Small samples should mirror population
Regression to the mean
Availability
Anchoring

4. Here’s an easy one Two hospitals, large one, small one
45 babies born each day in large hospital
15 babies born each day in small hospital
On average, 50 % of babies are male
Over the course of a year, which has hospital has more days when 60% or more babies born are male? The large one or the small one?

5. Which of the following is more probable?
A. That a girl has blue eyes if her mother has blue eyes
B. That the mother has blue eyes, if her daughter has blue eyes
C. That the two events are equally probable

6. In which prediction would you have greater confidence?
A. Prediction of father’s height from the son’s height
B. Prediction of the son’s height from the father’s height
C. Equal confidence

7. Which is more probable?
A. That an athlete won the decathlon, if he won the first event in the decathlon
B. That an athlete won the first event in the decathlon, if he won the decathlon
C. The two events are equally probable

8. Anchoring (how old was Gandhi when he died?)
B. 50
C. 70

9. Exam Coverage: Readings: Kahneman, Lewis, Burton & Shah Subjects:
Expected Utility Theory
Anomalies
Framing, Anchoring, Representativeness, Narratives, Small Sample Bias, Regression to the Mean,etc.
Loss Aversion: endowment effect, status quo effect
Intransitivities, path dependence
Loss aversion, prospect theory, comparison to “risk aversion”

10. The End