Time diversivifaction puzzle
What does time diversification mean in a classical financial understanding?
Risk diminishes over time
What emotion often makes investors want to sell a winning investment quickly?
Pride (the emotional reward of realizing a gain).
What is the main financial reason lump-sum investing dominates DCA when expected returns are positive?
Time in the market (or: Equity premium)
Dividends are typically placed in which mental account?
Income account
Which kind of error does Stateman propose time diversification has?
A Framing Error
Why do rational investors usually realize losses quickly?
Because realized losses reduce taxes (they create a tax rebate or deduction).
Which behavioral bias makes investors fear investing everything right before a market drop?
Loss aversion
This distinction between capital and dividends helps investors
Balance spending and saving wants
What is the key flaw with time diversification?
It ignores the magnitude of the potential los
What nickname did stockbroker LeRoy Gross use for investors’ habit of refusing to sell at a loss until they “get even”?
Getevenitis.
Which emotional force does DCA primarily reduce after a market decline?
Regret
Loss aversion helps explain the dividend puzzle because
Selling shares feels like a loss
In which scenario does time diversification not benefit the investor?
When the investor frames risk as the total amount of wealth lost
In prospect theory, what psychological reference point makes investors reluctant to realize losses?
The purchase price (the reference point investors want to get back to).
Does DCA eliminate risk or merely delay exposure to it?
Delay(or: Postponement)
If investors strongly prefer dividend-paying stocks, what is most likely to happen?
Their prices may increase
Why do normal investors prefer the bond ladder?
Because they can decide whether to realize losses or not.
What are the names of the two characters in the slides for this chapter?
Paul & Hannah
If you believe strongly in a positive equity premium, what does delaying investment implicitly signal about your short-term expectations?
Timing belief (or: Doubt or: Skepticism about immediate returns)
Which theory struggles to explain the dividend puzzle?
Expected Utility Theory