1. Explain the Law of Small Numbers. Then explain how it is relevant for investing. 2. Why are losses so much more painful than gains are helpful? (Use the web and check out Kahnamen and Tversky’s...

Explain the Law of Small Numbers. Then explain how it is relevant for
investing.
The Law of Small numbers refers to the hypercritical partiality that occurs when it is
presumed that the features of a sample data can be guessed from a small number of
observations. Unlikely prospects concerning the duplicity of connotation levels may be
exacted if the peculiarity between size and significance is simplified, and if the computed size
of observed effects is routinely reported. The true believer in the law of small numbers
commits his multitude of sins against the logic of statistical inference in good faith. The
illustration supposition describes a cognitive or perceptual bias, which operates regardless of
motivational factors. Thus, while the hasty rejection of the null hypothesis is gratifying, the
rejection of a cherished hypothesis is aggravating, yet the true believer is subject to both. His
intuitive expectations are governed by a dependable misconception of the world rather than
by opportunistic wishful opinion.
2. Why are loses so much more painful than gains are helpful? (Use the web
and check out Kahnamen and Tversky’s work).
Loses refer to the negative difference between the selling price and the cost price. Gains are
an additional parameter that one gains out of a business or an investment. Loses indicate
depletion of resources that one had to start with. It is fine not to make any profits as the
situation is standstill at least. But loses indicate decrement in one’s saved resources. The
situation of the person is depleting continuously if one he or she remains in loses. Hence, they
are more painful than the gains are helpful.
3. Explain the disposition effect. Then explain an investment strategy based on
the disposition effect.
The disposition effect is an incongruity revealed in behavioural finance. It recounts to the
inclination of investors to sell shares whose price has increased, while keeping assets that
have dropped in value. This is ridiculous behaviour, as the future performance of equity is
unrelated to its purchase price. If anything, investors should be more likely to sell rabble in
order to exploit tax reductions on capital gains. In a study by Terrance Odean, this tax-
motivated selling is only observed in December, the final opening to claim tax cuts by
delivery losing stocks; in other months, the temperament effect is typically observed.
4. Explain how each of the following is a contradiction to rational economics:

Higher Obesity Rates
Rational economics refer to wanting more of a good. Higher obesity rates refer to higher
consumption of food. They do not complement each other. The worthiness of rational
economics is undefined. Higher the obesity, higher is the consumption of food, that is, higher
purchase leading to profit. But the focus is on the value part. A person getting...