Question in currciculum on Behavioral Finance

CFA Level III Portfolio Management
#1

Question 5 in CFA book:

“I follow a disciplined approach to investing.When a stock has appreciated by 15%, I sell it. Also, I sell a stock when the price has declined by 25% from my initial purchase price”. This statement is most likely behaving consistently with:?

a- prospect theory

b-expected utility theory

c-behavioral portfolio theory

The answer was C-Behavioral Portfolio theory.(The elaborated answer was:the client sells and holds a stock not because of its stock potential, but rather from the fear of the stock declining in value and gains dissipating and an aversion to realizing losses. Loss aversion in prospect theory is disucssed from a different perspective). I thought it was A as the client here is holding on to losers longer than he holds on to winners as he is loss averse and thus this would be consistent with prospect theory.

I dont see this having anything to do with behavioral portfolio theory which discusses the concept of layers in a portfolio .

Can anyone help me on this?

#2

I never saw prospect theory on Schweser’s R #8.

This is exciting.

#3

Got it wrong as well. The only reasoning i’d follow here is that the investor decides among “prospects” = “Alternative” therefore prospect theory would better fit but no chance…

#4

Yeah I agree, when I came across this question and answer I was just like WTF! I just don’t get their explanation. I hate this super subjective behavioural crap where you have to make assumptive leaps in logic to fill in the gaps…I’ve decided to write this question off and concentrate on other things.

Just my way of dealing with the “cognitive dissonance” I guess…