An investor made the following two statements:
1) “I have been very pleased with the returns I’ve earned on Apple stock over the past 2 years and I am certain that it will be a superior performer in the future.”
2) “I am pleased with the returns from the Apple stock because I have specific uses for that money. For that reason, I certainly want my retirement fund to continue owning the Apple stock.”
Identify which principle of behavioral finance is most consistent with each of the investor’s two statements. (explanations are required)
Answer:
Biased expectations/overconfidence is most consistent with each of the investor’s two statements.
Explanation to the above answer
We could say that, biased expectations/overconfidence is most consistent with each of the investor’s two statements because Apple stock provides a level of particular confidence and with that it provide level of comfort for the investor . He has history with the returns and have consistent income from the stock. Even though this stock has consistent records of income it shows overconfidence in the stock to fulfill his the needs of her portfolio (when he retired) and the brevity of the historical performance history
