Behavioral - Don't think just fill in "C"

Here’s what I can remember from Behavioral: 1 Myopic Loss Aversion - DC members have too much in fixed income due to myopic loss aversion. If the dude shows them annual instead of long term returns what’ll happen? Maintain the current allocation; improve the allocation; dump even more into fixed income. C) Dump even more in F.I. 2 House money - Dude banks big dollars on a sweet PE deal - what’s the effect of his big gain on his view of the appropriate holding? Reduce the concentrated holding? Increase the holding? Maintain the existing holding? C) Maintain the existing holding. 3 At a conference the behavioral BSD is asked the big question: My clients have big losses in xyz corp stock. What’s there most likely reaction since their all loss adverse? Just sit on it, hope it recovers. Sell!!! Or Double down to try to recoup their losses. C) Buy buy buy! It can’t go any lower! 4 Behavior’s impacts on the market. Something along the lines of what market will induce the most trades. A market with chronic or acute inefficiencies, or someother condition… C) Acute inefficiencies. Can’t think of the last two (one about a star analyst or something) but I think I got C for all 6.

#'s 2,3,4 have been the subjest of some debate already

#2 – I remember that I read winning positions lead you to take more risk – I wrote Buy more. loss Averse – Never once did i come across someone buying more in any reading – they all just held it forever hoping it would come back –

Volume 2 page 27 ‘house money effect’ ‘after a market runup, the house money effect kicks in, raising investors tolerance for risk…’

Loss Aversion V 2 pg 14 Some people learn about “get-evenitis” Take the case of Nicholas Leeson. He lost of $1.4billion through trading for Barings PLC. …He asserts that he “gambled on the stock market to reverse his mistakes and save the bank.”

House money was in the historical essay question - 2005 - I think or 2006. Yes - Investor will take more risk - so #2 is taking more risk #4 should be chronic. The way I see it is, people who think they’re smarter than everyone else would trade more - i.e. hedge fund managers, who believe in chronic market inefficiency. However, I am not sure about #4 but I am very certain about #2 #1 and #3, I agree with your answer.

acute inefficiencies arent really investable…price dislocations that are quickly arbed away… chronic seemed to be right

Two more: 1. Naive diversificaiton - equity allocation = 60% (company stock + 2 equity funds out of total 5 options) 2. Why my client hire me if he’s doing everything himself - self attribution

chronic, like hedge funds, could trade alot… and even though they say chronic is often used by hedge funds. i tend to think of chronic as neglected stocks outperforming. but that’s low turnover. i definitely thought of this while reading the source material. but i would think if you believe in acute inefficiencies, you’re doing 100’s of trades a day potentially

I disagree with all of your answers except for #4.

I only agree with #4 too. I’m sure rest are wrong.

Smarshy Wrote: ------------------------------------------------------- > I only agree with #4 too. I’m sure rest are wrong. Thanks, appreciate it. For two: “Myopic loss aversion” “the short-term variability of equity returns increases their risk aversion and they allocate more heavily to fixed income.” So I’m pretty sure C. For the others you’ve got me, I might be a quarter right since loss aversion may lead to risk seeking behavior (he might start taking progressively riskier positions in hopes of at least breaking even), but ya the book says they’ll hold hoping that it recovers, I definitely hilighted the wrong part of that paragraph. So you got me. House money I took a stab at, I don’t think it was in schweser and I packed away the curriculum in february.

you went 2/4 imo.

Fair enough. I’ll give it 3 just for confidence. House money is a big red x tho.

stay in same position if market fall. -> bad undiversified poftfolio acute - to trade many times. chronic - once per 2 years :slight_smile:

that’s zactly what book sez but… higher tol for risk doesnt mean u buy more, does it? say ur highly concentrated portfolio went up by 25% overnight cause one of the companies got a bid at 100% premium. U now feel wealthier, right. But what that incremental bump in wealth means you are willing to bear a bit more give-back on those gains, thinking “well, i just made 25%, so I can give some back”. you don’t go “oh, this gain is my money and I gotta treat it the same way as I did my portfolio before it popped”. So u just let it be. U don’t go chasing more exposure. U tolerate more volatility, but u dont add. That’s my interpretation anyway… most likely incorrect… mark@dirtbags Wrote: ------------------------------------------------------- > Volume 2 page 27 > > ‘house money effect’ > > ‘after a market runup, the house money effect > kicks in, raising investors tolerance for risk…’

agreed. yeah, those were “gimmies” they gotta throw at least a couple of bones to the hungry mob :slight_smile: chaucy1999 Wrote: ------------------------------------------------------- > Two more: > > > 1. Naive diversificaiton - equity allocation = 60% > (company stock + 2 equity funds out of total 5 > options) > 2. Why my client hire me if he’s doing everything > himself - self attribution

loss averse tend to create risk seekers, so i said they add more.

The naive diversification one was not 60% in my opinion. It said the plan administrator had given a presentation to the investors, educating them on the problems with naive diversification. Thus they likely would not have allocated their money in a naive way. Instead they likely would have keenly seen the two separate equity funds as representing the same asset class and only chosen one of them, making their overall allocation closer to 50/50. (25% in co. stock, 25% in one of the equity funds, and 25% in each of the other options available).

westbruin Wrote: ------------------------------------------------------- > chronic, like hedge funds, could trade alot… > and even though they say chronic is often used by > hedge funds. i tend to think of chronic as > neglected stocks outperforming. but that’s low > turnover. i definitely thought of this while > reading the source material. > > but i would think if you believe in acute > inefficiencies, you’re doing 100’s of trades a day > potentially i have come across many people saying tht it was acute(some quoting CFA material). My question is this: the acute inefficiencies are Friction on trading, organisational barriers, capitalflows…none of these directly related to trading except capital flows…also as they can be removed easier than chronic, trading should reduce in the long run. chronic inefficiencies were Process vs outcome, herding, rigidity, price target revision, ebbulience…in all these there is trading applicability…hedge funds are known to focus on these… so how is it acute inefficiencies…