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2 pages/β‰ˆ550 words
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MLA
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Accounting, Finance, SPSS
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English (U.S.)
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Topic:

The Modern Portfolio Theory and Availability Bias

Essay Instructions:

1.Watch the video https://www(dot)youtube(dot)com/watch?v=CjBtyr2qxME (only 5 minutes). What I am interested in the part where he mentions that losses are much more devastating for us than gains are helpful. Using this video discuss the following question: what is the evolutionary reason why losses hurt more than gains help?
2.Watch this 8 minute video on the disposition effect in trading https://www(dot)youtube(dot)com/watch?v=0B4RDwu2XjM
What are some solutions for this problem according to the video?
3.Harry Markowitz, the founder of modern portfolio theory, quote (in Lecture 2) where he says he invests 50 percent in stocks and 50 percent in bonds to prevent regret is amazing to me. Rather than following his own mathematical advice of modern portfolio theory to determine his optimal allocation of stocks and bonds, he instead relies on emotions to guide his decisions. He talks the talk but does not walk the walk in terms of investment decisions. Give me one example from your life where you see someone (or yourself) talk about passionately about doing one thing, but in their own life they do not do this (does not have to be in finance or economics). Then try to explain why this happens.
4.How are you guilty of the availability bias?
5.Take two people. An emergency room nurse dealing with coronavirus every day at work, and a Wall Street executive (who has not been around anyone who is sick). Using the availability bias, why might the nurse overestimate the likelihood of an average person getting the virus while the Wall Street executive might underestimate the likelihood of the average person getting the virus? What does this say about our ability to forecast?

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Real Week 8 Discussion
1
Losses hurt more than gains help mainly because of the aspect of loss aversion. People are naturally loss-averse, and this often leads to bad financial decisions while trying to hold onto hope that things will get better with time. For example, if a person invests in a stock that is currently making losses, instead of counting their losses and moving on to another idea, such a person is likely to choose to hold onto their stock. Loss aversion makes people act irrationally because of the lack of acceptance of the losses they are experiencing. Also, there is also the notion that it takes more to cover a loss. For example, a loss of 50% needs to be covered by a gain of 100%. Such an understanding makes people increasingly aware and averse to losses.
2
According to the video, the possible solutions to the disposition effect entail having a profit target and avoiding the temptation to get out of a trade before reaching one’s target. The second solution entails having a definite stop loss. An investor should avoid the temptation to move the stop loss further away while in a trade. Moving the stop loss while in a trade makes it possible for one to stay longer in a losing trade while exposing oneself to more losses. Finally, one has to consider the relationship between the potential risk and profit. At all times, the potential profit should be higher than the potential risk. This should be done to ensure that at all times, one is earning increasingly more in the event a trade materializes positively.
3
I have been increasingly moved by the desire to develop a daily routine to start ...
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