Your brother Joe is a surgeon who suffers badly from the overconfidence bias. He

Question

Your brother Joe is a surgeon who suffers badly from the overconfidence bias. He loves to trade stocks and believes his predictions with 100 % 100% confidence. In? fact, he is uninformed like most investors. Rumors are that Vital Signs? (a startup that makes warning labels in the medical? industry) will receive a takeover offer at ?$ 20.00 20.00 per share. Absent the takeover? offer, the stock will trade at ?$ 15.00 15.00 per share. The uncertainty will be resolved in the next few hours. Your brother believes that the takeover will occur with certainty and has instructed his broker to buy the stock at any price less than ?$ 20.00 20.00. In? fact, the true probability of a takeover is 50 % 50%?, but a few people are informed and know whether the takeover will actually occur. They also have submitted orders. Nobody else is trading in the stock. a. Describe what will happen to the market price once these orders are submitted if in fact the takeover will occur in a few hours. What will your? brother's profits? be: positive, negative or? zero? b. What range of possible prices could result once these orders are submitted if the takeover will not occur. What will your? brother's profits? be: positive, negative or? zero? c. What are your? brother's expected? profits? a. Once these orders are? submitted, if in fact the takeover will occur in a few? hours, the market price will be ?$ nothing and your? brother's profits will be ? positive negative zero . ?(Round to the nearest cent and select from the? drop-down menu.)

Explanation / Answer

If takeover takes place, offer would be $20 If no takeover, share trades at $ 15 a) If takeover takes place both your brother and people who expect the takeover to take place would give buy order to buy for less than $ 20 and if takeover takes the only market trading price would be $20, hence your brother's profit would be zero b) If takeover doesn’t take place and if people had expected the same they would have given sell order for above $ 15 and your brother would submit his buy order for less than $20 expecting that takeover would take place and hence the price range would be between $ 15 and $ 20. Since the takeover has not taken place the share would be trading at lower price, and your brother's profit would be negative c) Your brother has 50% chance of profit being negative if the takeover doesn’t take place and 50% chance of zero profit if takeover takes place

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