Question

One of the core problems that created the financial meltdown of 2008 was that large loans were made to individuals who could not repay them, and the finance companies purchased these bad debts without realizing how poor the prospects of repayment were. Which of the following decision-making errors was made by the lenders and borrowers?A) hindsight biasB) availability biasC) overconfidence biasD) confirmation biasE) anchoring bias

Answer 1

Answer:

The correct answer is letter "D": confirmation bias.

Explanation:

In psychology, confirmation bias is a cognitive process by which individuals tend to favor input to confirm certain beliefs or biases they already had. The term is associated with behavioral finance at the moment of determining subjective and poor decision making.

Usually, this happens when investors are too optimistic over certain instruments, so, they look for information that can ensure their position over the instrument is correct and dismiss all input that could state the opposite, even if it is true.

Answer 2

Answer:

D) confirmation bias

Explanation:

Confirmation bias, the tendency to process information by looking for, or interpreting, information that is consistent with one’s existing beliefs. This biased approach to decision making is largely unintentional and often results in ignoring inconsistent information. Existing beliefs can include one’s expectations in a given situation and predictions about a particular outcome. People are especially likely to process information to support their own beliefs when the issue is highly important or self-relevant.

Confirmation bias is important because it may lead people to hold strongly to false beliefs or to give more weight to information that supports their beliefs than is warranted by the evidence.