【正文】 an appropriate holding for his portfolio and/or a good investment) and its future performance. This can result in employees’ overweighting their pany stock, thereby holding an underdiversified portfolio4. a. The behavioral finance principle of biased expectations/overconfidence is most consistent with the investor’s first statement. Petrie stock provides a level of confidence and fort for the investor because of the circumstances in which she acquired the stock and her recent history with the returns and ine from the stock. However, the investor exhibits overconfidence in the stock given the needs of the Trust and the brevity of the recent performance history. Maintaining a 15 percent position in a single stock is inconsistent with the overall strategy of the Trust, and the investor’s level of confidence should reflect the stock’s overall record, not just the past two years.b. The behavioral finance principle of mental accounting is most consistent with the investor’s second statement. The investor has segregated the monies distributed from the Trust into two “accounts”: the returns the Trust receives from the Petrie stock, and the remaining funds that the Trust receives for her benefit. She is maintaining a separate set of mental accounts with regard to the total funds distributed. The investor’s “specific uses” should be viewed in the overall context of the spending needs of the Trust and should consider the risk and return profile of the entire Trust.5. i. Overconfidence (Biased Expectations and Illusion of Control): Pierce is basing her investment strategy for supporting her parents on her confidence in the economic forecasts. This is a cognitive error reflecting overconfidence in the form of both biased expectations and an illusion of control. Pierce is likely more confident in the validity of those forecasts than is justified by the accuracy of prior forecasts. Analysts’ consensus forecasts have proven routinely and widely inaccurate. Pierce also appears to be overly confident that the recent performance of the Pogo Island economy is a good indicator of future performance. Behavioral investors often conclude that a short track record is ample evidence to suggest future performance.Standard finance investors understand that individuals typically have greater confidence in the validity of their conclusions than is justified by their success rate. The calibration paradigm, which pares confidence to predictive ability, suggests that there is significantly lower probability of success than the confidence levels reported by individuals. In addition, standard finance investors know that recent performance provides little information about future performance and are not deceived by this “l(fā)aw of small numbers.”ii. Loss Aversion (Risk Seeking): Pierce is exhibiting risk aversion in deciding to sell the Core Bond Fund despite its gains and favorable prospects. She prefers a certain gain over a possibly larger gain coupled with a smaller chance of a loss. Pierce is exhibiting loss aversion (risk seeking) by holding the High Yield Bond Fund despite its uncertain prospects. She prefers the modest possibility of recovery coupled with the chance of a larger loss over a certain loss. People tend to exhibit risk seeking, rather than risk aversion, behavior when the probability of loss is large. There is considerable evidence indicating that risk aversion holds for gains and risk seeking behavior holds for losses, and that attitudes toward risk vary depending on particular goals and circumstances.Standard finance investors are consistently risk averse, and systematically prefer a certain oute over a gamble with the same expected value. Such investors also take a symmetrical view of gains and losses of the same magnitude, and their sensitivity (aversion) to changes in value is not a function of a specified value reference point.iii. Reference Dependence: Pierce’s inclination to sell her Small Company Fund once it returns to her original cost is an example of reference dependence. Her sell decision is predicated on the current value as related to original cost, her reference point. Her decision does not consider any analysis of expected terminal value or the impact of this sale on her total portfolio. This reference point of original cost has bee a critical but inappropriate factor in Pierce’s decision.In standard finance, alternatives are evaluated in terms of terminal wealth values or final outes, not in terms of gains and losses relative to a reference point such as original cost. Standard finance investors also consider the risk and return profile of the entire portfolio rather than anticipated gains or losses on any particular investment or asset class.1214