Which of the following statements do not support the Theory of Behavioral Finance?

Question

BlackTom AI · Accepted Answer

Passive ETF investing reflects acceptance of market efficiency and a rational, cost-minimizing portfolio choice rather than a behavioral anomaly.

1) Relevant concepts and knowledge points
- Behavioral finance documents systematic deviations from rational decision-making: overconfidence, herd behavior, disposition effect, confirmation bias, lack of diversification (home bias, familiarity), and trading on tips/information cascades.
- Efficient Market Hypothesis (EMH) and rational finance explain why passive investing (index funds/ETFs) is a sensible, utility-maximizing choice for many investors: lower fees, broad diversification, and avoidance of costly active trading.

2) Step-by-step reasoning
- Evaluate each option against behavioral finance concepts:
  a) "Investors only invest in passive ETFs": This is consistent with rational acceptance of market returns and cost minimization; it is not prima facie an example of biased or irrational behavior.
  b) "Investors trade on tips, failing to do their own analysis": Matches heuristic-driven behavior, herd/information cascade, and reliance on anecdotal advice — classic behavioral finance territory.
  c) "Investors fail to diversify their portfolios": Reflects home bias, familiarity bias, and bounded rationality — well-documented behavioral anomalies.
  d) "Investors sell winning investments and hold losing ones": This is the disposition effect (loss aversion and regret avoidance), a canonical behavioral finance finding.

3) Calculations and intermediate steps
- No numerical calculations are required; the reasoning is conceptual and judgment-based.

4) Why the correct answer is correct
- Passive ETF-only investing is typically a rational strategy recommended by financial economics: it minimizes fees, provides diversification, and accepts market returns. Because behavioral finance focuses on departures from rationality, “Investors only invest in passive ETFs” does not support behavioral finance in the way the other statements do.

5) Why the other options are incorrect (i.e., they do support behavioral finance)
- Trading on tips: illustrates herding and reliance on heuristics.
- Failing to diversify: shows home bias and suboptimal portfolio construction due to cognitive limits.
- Selling winners and holding losers: directly exemplifies the disposition effect and loss aversion.

6) Conclusion
- Therefore the statement that does not support the Theory of Behavioral Finance is “Investors only invest in passive ETFs,” which matches the provided answer.

Which of the following statements do not support the Theory of Behavioral Finance?单项选择题

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