- loss averse (buy more or hold) - house money (take more risk) - short term memory effect, changing from long term return to annual return (make things worse) - acute vs. chronic (acute) - equity allocation (60%) which one am i missing?
The one where the client is making most decisions but still using professional - self attribution
self attribution - confident investor still uses an advisor to prevent cognitive dissonance. i think
word
thanks, guys. have we all agreed on the answers except the loss averse one?
For the loss averse one, i wrote buy more…since they are prone to more risk seeking behaivor if they are loss averse…so they are more likely to double down I wrote acute myself, but i think that it could of been chronic since hedge funds trade more to explore chronic inneficiencies since acute ones are easily exploited…that was a tricky question
Hedge funds take large, singular bets on chronic inefficiencies, whereas acute inefficiencies are quickly dispersed due to heavy trading. Acute inefficiencies are commonly exploited by quant shops who trade extensively.
i had risk seeking too, so i think i’m 5/6 at least. no one will know the answer to loss aversion.
cp0821 Wrote: ------------------------------------------------------- > - loss averse (buy more or hold) > - house money (take more risk) > - short term memory effect, changing from long > term return to annual return (make things worse) > - acute vs. chronic (acute) > - equity allocation (60%) > > > which one am i missing? For the Short term memory effect, I agree it will make things worse… But the 2 choices ( A and C) meant the same thing… Which one did you choose?
no, the answers were 1) lift the problem 2) no impact 3) make it worse
same 5/6 at least, never been good at behavioral finance but did an intense review on friday which helped me a lot. for a quick footnote: 2008 Exam question #2 part 2 (still have not come to a conclusion even after this but smells like loss averse investors hold on): “I am holding a large position in Omega Corporation with a large unrealized loss. Omega’s stock price declined last year when reported sales and earnings failed to meet analyst expectations. I took advantage of the decline to increase my position. Omega sales growth has continued to slow over the last year, but I believe the stock is still a good investment.” Select the behavioral finance concept best exhibited in each of Donaldson’s three statements.: Answer: “REGRET AVOIDANCE” Donaldson’s reluctance to sell his losing position reflects both regret avoidance and belief perseverance. To avoid the stress associated with admitting a mistake, he hopes the stock will recover. Despite new information (slowing sales and lower than expected sales and earnings), Donaldson has held onto his beliefs. He has increased his position rather than admit a mistake by taking the loss.
The equity allocation one was not 60% in my opinion. It said the plan administrator had given a presentation to the investors, educating them on the problems of naive diversification. Thus, having learned the ill-effects of this bias, 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). Anybody agree with this?
regret avoidance = regret minimization is not = loss aversion is that what you’re getting at?
On the loss aversion, they seek to avoid realizing losses so they will just hold. I think this is what they were after.
JustPass Wrote: ------------------------------------------------------- > On the loss aversion, they seek to avoid realizing > losses so they will just hold. I think this is > what they were after. the more and more we talk about this the more i am confident this is the right answer
Loss aversion = Willing to take on bigger unknown losses (as in other investments) as opposed to smaller guaranteed losses ==> Hold
Jscott24 Wrote: ------------------------------------------------------- > regret avoidance = regret minimization is not = > loss aversion > > is that what you’re getting at? yes, i just wanted to point out increasing a losing position was defined as “regret avoidence” by CFAI in 2008 regret avoidance=increase loss aversion=hold
itstoohot Wrote: ------------------------------------------------------- > Jscott24 Wrote: > -------------------------------------------------- > ----- > > regret avoidance = regret minimization is not = > > loss aversion > > > > is that what you’re getting at? > > yes, i just wanted to point out increasing a > losing position was defined as “regret avoidence” > by CFAI in 2008 > > regret avoidance=increase > loss aversion=hold exactly…nice
On CFAI curriculum, they gave nice example on loss aversion. Basically people take more risk by buying additional stocks when they are loss averse. don’t have pg number with me but you can easily search under “loss aversion” and find p.g. number on the back of the book…
yeah, someone needs to go to the curriculum. on the 08 exam, loss aversion wasn’t an answer choice of the 5 or whatever choices.