Crowdly

Ignoring information that contradicts prior beliefs

More realistic forecasts

Avoiding affect heuristics

In Behavioural Corporate Finance, managers issue equity when:

They strictly follow MM assumptions

They perceive equity to be overvalued

They follow rational capital structure theory

They think stock is undervalued

The sunk cost effect persists in decision-making mainly because:

People update probabilities perfectly

Past costs are economically relevant

Expected utility theory demands it

Individuals feel compelled to continue once they invest effort or money

Winner’s curse in M&A occurs because:

Targets are systematically undervalued

Overconfident bidders overestimate the target’s value

Markets are always efficient

Due diligence eliminates behavioural bias

Behavioural EMH argues that:

Arbitrage always eliminates mispricing

Markets are easy to beat

Prices always equal intrinsic value

Markets may be hard to beat even if prices deviate from fundamentals

Mental accounting violates traditional finance because it:

Assumes all money is fungible

Eliminates sunk cost effects

Treats money differently across mental categories

Enforces rational budgeting

According to Lintner’s behavioural model of dividends, managers:

Do not consider investor reactions

Change dividends frequently based on short-term earnings

Are indifferent to dividend smoothing

Prefer stable, sticky dividends

fMRI studies on herding suggest that investors herd because:

Their brain’s reward circuitry activates when conforming

System 2 dominates System 1

They prefer diversification

Herding maximises long-term returns

Which neurotransmitter is most associated with reward-seeking behaviour in neurofinance?

Acetylcholine

Serotonin

Cortisol

Dopamine

Which of the following best explains why arbitrage is limited in practice?

No fundamental risk exists

Noise traders quickly correct mispricing

Arbitrageurs have infinite time horizons

Resale price risk and funding constraints restrict arbitrage positions