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% 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 $20.39 per share. Absent the takeover offer, the stock will trade at $15.96 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 $20.39. In fact, the true probability of a takeover is 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? 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? . (Round to a. Once these orders are submitted, if in fact the takeover will occur in a few hours, the market price will be $and your brothers profits will be the nearest cent and select from the drop-down menu.)

Explanation / Answer

Soln : a) As per the given information, Takeover signs = 20.96, while without takeover the prices are 15.96

With this news , price would immediately move very fast towards the Takeover price, in which no investor will gain and hence profits would move to 0.

b) In case if the takeover will not occur the investors will sell the stock at $15.96 and hence more supply will be there in the market, hence it will put pressure on prices to drop. It leads to loss who was buying at that time.Range will be 20.96 on higher side to any value upto15.96. Brother's profit will be negative.

c) So, we can say frpm the above scenarios discussed in both cases is Brother expected profits would be either 0 or negative only.

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