Attempt at creating an exhaustive list. If I missed anything please add 1. availability bias 2. Representativeness 3. Gambler’s fallacy 4. Overconfidence. 5. Anchoring. 6. Aversion to Ambiguity 7. Frame dependence 8. Hedonic Editing 9. House Money effect 10. Self Control 11. Regret avoidance. 12. Money Illusion 13. Myopic Loss aversion. 14. Rule of five 15. Naive Diversification. 16. Bounded Rationality 17. Bounded self control 18. Boundedly selfish. 19. Status Quo Bias 20. Endorsement Effect 21. Conservatism Bias. 22. If only defense 23. Ceteris Paribus defense 24. Single Prediction 25. Acute and chronic inefficiencies. 26. Fast-slow Dichotomy. 27. Compounding Consensus. 28. Bayesian Rigidity 29. Price Target Revisionism 30. Unopened Envelope Syndrome. 31. Hindsight Bias. 32. Overreaction. 33. Belief Perseverance. 34. Confirming Evidence. 35. Prudence Trap. 36. Recallability Trap. 37. Five Year Rule.
Wow, thanks! You are an expert!
Good effort, but how does actually making a raw list like this help?
I have examples for each of the biases. Too much to type up for all but if you are interested in any on the list let me know.
what is rule of 5 and five year rule
@Veda - Thanks! @jbaphna - it’s useful for highlighting gaps. To be fair, *we* should know what they all mean by now. I think Rule of 5 is that people believe that if they choose 5 investments, 1 will probably do poor, 3 three will be okay, and 1 will be the big winner and give a massive payoff. I think it was in the DC pensions section and to do with how people choose their investments. Not sure about the 5 year rule. Maybe move your pension into safer assets five years before planned retirement date. Not sure though. Note re #30 : Unopened Envelope Syndrome is also know as the Ebullience Cycle and is defined as ‘correlating feelings with market’.
There’s the anchoring trap and also anchoring-and.adjustment - two different concepts.
Hi Veda This is very helpful Can you provide examples of rule of five, five year rule, fast-slow dichotomy and compounding consensus?
Yeah there is a good 20% that I never heard of…
I love how we’re getting tested on nitpicky things that some dude just made up.
Each of the terms comes from the original CFAI readings so I understand for those just using Schweser or Stalla it may seem like it is made up and you are free to ignore them. To answer questions for others Rule of 5 and Five year rule: please read the post above by mutton. It is right on the money Fast-Slow Dichotomy: Swim against the tide. If the average investor span is shorter than investors with a longer horizon would profit. Compounding Consensus: Very similar to confirming evidence. Seek opinions of other experts who can confirm one’s own views.
oh i used schweser… it seems that i haven’t heard of at least 10 of them… 8. Hedonic Editing 9. House Money effect 16. Bounded Rationality 17. Bounded self control 18. Boundedly selfish. 24. Single Prediction 26. Fast-slow Dichotomy. 27. Compounding Consensus. 33. Belief Perseverance. 37. Five Year Rule.
Hednoic Editing is Frame Editing. House Money is gambling, stock is up 100% I have 100% to invest in something more aggressive as it isn’t my money. Bounded Self Control: Living off income, if I don’t sell shares I will always have xxx money. Single Prediction: Choosing to look at something you did right once, or the opposite, telling others that one thing I did wrong was single. Belief Perseverance: is maintaining one’s belief’s in the face of new information. I read the texts in this chaptesr probably 4 times and swear I have never seen the other ones.
Thanks Veda, it good to have all these in one place. And yes, I’ve come across most of these terms in the text, but just couldn’t place them
…only one you miss is “snake bite effect” this is on the AM exam in 2007 or 2008 (I am not sure precisely) I however think it is same as recallability trap.
guys, I saw this snake bite honey puts also in older exam luckily, we are getting tested on the 2011 currucilum and this stuff doesn’t show up in the curriculum a little less point loss aversion and focusing on overall risk would be great I made this from the current stuff (but disclaimer, its from my perspective and not CFAI proved and you have to decrypt this as html does not work in these posts) Keyword Theme? What How To Detect Representativeness Heuristic Simplifying decisions (if-then, good comp = good invest) Base expectations upon past experience Overconfidence Heuristic Too much confidence in your ability to predict (Sascha), narrow confidence intervals Look only at supporting data, ignore downside potential, cognitive dissonance Anchoring and Adjustment / Conservatism Heuristic Stick to OLD info (conservatism) New information is ignored (NEW!) Aversion to ambiguity Heuristic Trend following, momentum Think prices move only in one direction Emotion and cognition Heuristic Fearing low probability event Fearing low probability events Frame Dependence Frame Depencence Think in a frame, dependent of it Like in media, your circumstances Loss aversion Frame Dependence Get-evenitis, loss feels 2,5 times harder than gain risk SEEKing Not selling anything at a loss Self Control Frame Depencence Desire to maintain control While younger guy invests more heavily. Older one sticks to dividends and coupons to not outlive assets Regret Minimization Frame Dependence Feel in hindsight to have made a bad decision, you want to avoid that Stay in comfortable investments, do NOT sell profitable investments but live from their cashflows – hold onto losers too long BUT sell with release of bad news about economy Money Illusion Frame Depencence People think more in nominal amounts than with inflation Real vs. nominal returns and reaction Representativeness Inefficient Markets Make incorrect projections, stocks can temp be mispriced Good earnings and appreciating price Anchoring Inefficient Markets Positive (negative) adjustments tend to be followed by positive (negative) surprises Selling stocks with negative earnings surprises Frame dependence Inefficient Markets Tendency (frame) risk tolerance to direction or market Momentum: if markets rise, loss averse investors jump in Overconfidence Inefficient Markets Concentrated portfolios and reduced returns from trading costs Overly confidence and perceived ability (SAM) Forecasting Folly / Overconfidence in them Portfolio Not recognizing shortcomings but investors still want to base decision on experts, a form of anchoring “Illusion of knowledge”, Hope and Fear Portfolio Potential gains drive investors risk tolerance Aspirations, potential gains Pyramiding Portfolio Not a diversification perspective but segment risk like pyramids; each layer after the next one Viewing pyramid from the perspective of considering aspirations “USE … FOR….” Optimism / Overconfidence Portfolio Increased trading; net return less than indexed portfolio Belief you are better investor and select superior investments Naïve diversification Portfolio 1/n diversification – ending up wit h too little or not enough risk Employer offers 2 choices, each are taken with 50% Status quo bias Pension DC Make allocation and not change it Buy and hold 1/n Pension DC 10 funds –> each 10%, not right risk level Endorsement effect Pension DC MISCONCEPTION that if employer offers fund x, this is endorsed Holding too much comp stock Pension DC Coming from endorsement , familiarity Stock ownership plans seen as endorsement Comfortable: familiarity Gamblers Fallacy Believe in extreme mean reversion Your on a lucky road and this will continue
I googled a couple of them… not sure these are completely correct… 1. Availability bias – Making decisions based on the information that is most convenient. 8. Hedonic Editing - Frame dependence, similar to mental accounting, where you ignore losses and celebrate gains. 16. Bounded Rationality – Investors are not rational due to lack of knowledge. 17. Bounded self control – People may not “do the right thing” even when it is obvious. 18. Boundedly selfish – An investor not necessarily making investment’s that are in their best interests, eg putting too much in company stock. There’s a useful older post here… http://www.analystforum.com/phorums/read.php?13,724392
haha me neither…sht! thanks Schweser!
- Single Prediction 26. Fast-slow Dichotomy. 32. Overreaction could someone explain the above three please? thx
guys, again, don’t google but make the word search for these OLD AND NOT CURRENT ITEMS IN YOUR CFAI DIGITAL VERSION 2011 you will see they won’t show up and thus could reasonably not be part of the curriculum in law we say that nothing is more dangerous than an outdated commentary…