Behavioral Finance

CFA Level III
#1

does anyone have a cheat sheet on all the different types of cognitive and emotional biases?

#2

FAMA

CC’RIHder

#AcronymsHelp

#3

con con con hin rep

an av fra men

losers

#4

Bump

#5

BICCRS FAAAM - (EMO) LOSSSERS1

  • Cognitive Errors - Belief Perseverance Biases (Cognitive Dissonance) “BICCRS”: The mental discomfort with new info that conflict with previous beliefs, this is made up by a number of biases:

  • Base Rate Neglect places basis or probabilities when using the wrong categorization, i.e. incorrectly labeling a stock as a “growth stock” when it is a “value stock”.

  • Illusion of Control Bias is the concept that people believe they can control certain outcomes when they can’t.

  • Conservatism Bias is when people maintain their previous beliefs in light of new information.

  • Confirmation Bias is the concept that people tend to look for things that confirm their beliefs and ignore information that contradicts their beliefs.

  • Representation Bias is the concept that people categorize new information based on past experiences and classifications. An example is categorizing a stock as a growth stock because it has some characteristic of a growth stock from prior experience.

  • Sample Size Neglect is the concept that sample does not represent actual population

  • Cognitive Errors - Information Processing Biases “FAAAM”:

  • Framing Bias is where people answer questions differently based on how questions are presented given the same probability outcomes.

  • Anchoring and Adjustment Bias is where people need to estimate a value and place an initial biased estimated and adjust up or down from that predetermined estimate regardless of its application or suitability, i.e. forecasting EPS based on a prior bias in light of new information.

  • Availability Bias is where people estimate outcomes based on how readily they can recall thoughts, ideas, or experiences. This includes Retrievability (How quickly things come to mind), Categorization , Narrow Range of Experience , and Resonance (How things relate personally).

  • Mental Accounting Bias is where people treat two equal sums of money differently based on a mental account of where the money comes from and what it is assigned, i.e. bonus money is more for leisure that your bi-weekly paycheck. This is false given all dollars are essentially fungible.

  • Emotional Biases “LOSSSERS1”:

  • Loss Aversion Bias is where people strongly oppose losing money as opposed to achieving gains, i.e. it feels much worse to lose in comparison to how good it feels to win. A classic example is the Disposition Effect where investors hold on losing stocks cause they don’t want to sell and realize losses in hope they will return to break even or gain, while at the same time sell their winning stocks too soon to lock in the gains.

  • Myopic Loss Aversion states that investors are more concerned with the short term gains and losses and in general this behavior helps to keep equity premiums high.

  • Overconfidence Bias is when people demonstrate unwarranted faith in their own reasoning. Includes Self Enhancing Bias and Self Protecting Bias which are when people tend to take credit for positive outcomes, but then to blame others for negative outcomes.

  • Self Control Bias is when people fail to act in pursuit of their long term goals because of a lack of self discipline.

  • Endowment Bias is when people tend to value an asset more when they hold right to it then when they do not, i.e. homeowners thinking their property is worth more than the market thinks for sentimental reasons.

  • Regret Aversion Bias is when people tend to avoid making decision in fear that they will result in unfavorable outcomes.

  • Status Quo Bias is when people do nothing instead making a change to benefit outcomes.

  • 1/N’th Diversification Bias is when people divide their assets equally among all investment options.

#6

thank you