-Which of the following statements best describes the illusion of knowledge? A.
ID: 2821268 • Letter: #
Question
-Which of the following statements best describes the illusion of knowledge?
A. The belief that positive statements by corporate executives about their company's future prospects are likely to be true
B. The belief that information that you possess is superior to information that's held by other investors
C. The belief that publicly announced financial information has already been discounted in market prices.
-Which of the following best describes a noise trader?
A. A trader whose trades are driven by the prospect of future events
B. A trader whose trades aren't based on meaningful financial analysis or information
C. A trader who uses technical analysis to pick his or her securities
D. A trader who uses fundamental analysis to pick his or her securities
D. The idea that because an investment manager has been right on past stock picks he or she will continue to make superior picks in the future.
Explanation / Answer
1. In behavioral Finance, Illusion of Knowledge is a tendency or behavior of investor where he believes that the more information leads to accuracy in the decision making. In simple words, it means that we think we know more than we actually do.
In given options, option B indicates illusion of knowledge. Because in ideal market, every investor will have access to similar information about any company, but believing that our information is superior than that's held by others is a classic example of illusion of knowledge.
2. Noise Trader basicaaly means that a trader who takes trading decision based on noise about the company which may or may not be true rather than looking at more legible information like financial statements, technical analysis, fundamental analysis etc.
In given options,option B is the example of noise trader. Because his trades are not based on meaningful financial analysis or information but it means that these trades are based on the noise created in market about the company.
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