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Study Session 3: Behavioral Finance

Behavioral Finance Recommendation

I have seen some posts on the “dryness” of behavioral finance and figured I would recommend a great book about the subject. The book is titled Misbehaving, written by Richard Thaler, who won a Nobel Prize in economics and its a great read (even outside of the CFA curriculum). I know not a lot of people dont want to take on extra reading while studying, but it has some great detailed examples of the same biases (because Richard Thaler discovered most of them) talked about in the CFA curriculum. 

Forgetting already - cognitive bias

So… I felt really bad about my L1 exam and felt ok about my L2 right after the exams, and I passed both. Now I feel pretty good about my L3. What kind of bias am I experiencing? I can’t believe I am forgetting already. Ouch!

Regret Bias

Regarding Regret Bias:

A client with a regret bias has two stocks in his portfolio;

1. Stock A, Purchase price was USD50, and current price is USD60

2. Stock B, Purchase price was USD 55, and current price USD47

The correct answer is that he would fear to take any action in either stocks. But I have two questions regarding the example;

1. Does this mean that for a client with regret bias, the portfolio has to be discretionary where the manger takes all the decisions and the client is not involved in the decisions after formulating the IPS.

Mental Tricks/Mnemonics for Behavioral Investor Types (BITs)?

Does anyone have any tips or mental tricks for knowing the biases and definitions of the Behavioral Investor Types (BITs)?

Most common emotional biases exhibited:

  • Passive Preserver: Endowment, loss aversion, status quo, regret aversion.

  • Friendly Follower: Regret aversion.

2010 AM Mock Question 2C

Here guideline answer says that decreasing interest rates resulted in underperfomance, giving that Stewart uses short duration strategy. But shouldn’t shorter duration lead to overperfomance if yield curve steepens (decreasing interest rates)?


Goal Based Investing

When constructing layers does goal based investing consider the correlation between them and if not how is it any different from behavioural portfolio theory or mental accounting?


Reading 9. Eoc 3. 

Why does home bias win over overconfidence bias? 

behavioral bias

Would you sell a recent equity investment following a management announcement of a significant decline in the expected growth rate of revenue?

Identify the behavioral bias that the diagnostic question is most likely to reveal.

Answer: Anchoring. Anchoring is the tendency to continue using information that had been used in past decisions despite the availability and relevance of new information. As a result, investment decisions become difficult to reverse when the new information indicates that a change is advisable.