In this assignment, you will apply your financial literacy. Submit a word or Excel document with your answers to the following questions or exercises.
Q1 (10 pts) Recognizing Cognitive Biases
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Most of the time, decisions are made without people even realizing the “why” behind their decisions. Our decisions are often driven by our own biases instead of logic or good judgment. These numerous “poor instincts” are called cognitive biases. It is important to identify cognitive biases in Personal Finance because they cause so many of the common financial errors in our society. Google defines these as follows: “Cognitive biases are tendencies to think in certain ways that can lead to systematic deviations from a standard of rationality or good judgment, and are often studied in psychology and behavioral economics.” This is one reason why in personal finance, learning the tools tends to be much easier than applying them.
Here is a list of possible biases that are closely related to personal finances (not comprehensive): ambiguity effect, anchoring, bandwagon effect, confirmation bias, denomination effect, endowment effect, gamblers’ fallacy, hot-hand fallacy, IKEA effect, illusion of control, loss aversion, money illusion, ostrich effect, planning fallacy, restraint bias, zero risk bias, and sunk cost fallacy.
Choose three of the biases and conduct an internet search for each one. Answer the following questions for each bias.
a. Define the bias.
b. How does the bias affect personal finance decisions?
c. What are some ways the bias can be overcome?
Be sure to cite your references. If you can, provide any personal experience/observation of the bias clouding judgment in a personal finance decision. Your responses to the three questions should be a minimum of 150 words per bias.
Q2. (10 pts) Identify personal financial goals and develop action plans to achieve them. Using the Chapter 1 Personal Financial Planning worksheets provided in the Additional Student Resources link in this module (right above the Supplemental Readings), complete a Setting Financial Goals worksheet for yourself (the second tab in the excel file). You may copy the completed form into Word or submit the Excel file. Make sure your goals are SMART (Specific, Measurable, etc.). The Financial Literacy in Practice feature (textbook page 10) provides a guide to creating financial goals and evaluating your current financial activities for achieving goals. Also, see the Goal Setting Guidelines (Links to an external site.)article found in the MO2 supplemental readings (Links to an external site.)
Q3. (10 Pts) Conduct research to identify at least three budgeting and money management apps. Write a short report (minimum 300 words) describing the features, ease of operation, and information provided by these apps. Which app(s) would you consider (or are currently) using for your budgeting and money management activities? See the article on the Top 5 Money Management Apps (Links to an external site.) in the supplemental readings for ideas. Also, this article (Links to an external site.) on cash management references some popular apps. Be sure to cite references at the end of your report.