5/6
ok i skimmed through the curriculum: there are 3 different chapter that refer to loss-aversion and all of them talk pretty much about the same thing. The bottomline is “loss aversion leads to risk-seeking behavior”. But it’s important how we define risk seeking behavior. It sounds more like not accepting losses, to prefer an uncertain to a certain outcome is meant by risk seeking behavior. It doesn’t explicitly mention increasing positions (but again I read the whole thing very quick, i couldve missed some parts) Two examples (Nick Leeson and Apple’s Newton) support “increase” camp’s argument, we all know how Leeson messed up and Apple increased its position by investing more to a laggard hoping that it’ll beat Palm. One example (stockbroker) supports “hold” camp’s argument. BUT, on page 276 first three lines “studies have shown that investors will increase their risk, defined in terms of uncertainty, to avoid even the smallest probability of loss” So it think above statement is closer to the “hold” camp’s argument. I believe both answers should be awarded with a + here. The text is so confusing you can’t comfortably say “hold” or “increase”. Full Disclosure: Position–>“Hold”
yeah, i’m kinda in the hold camp now. just read schweser, and its really not clear taking more risk is doubling down so to speak. just talks about an investment manager taking more risk in general.
well, after reading CFAI—clearly talks about “get-evenitis” in great detail. i dunno, maybe buying more shares is the right answer.
i don’t thing any question has divided the board members more than this one. There are very valid cases for hold and more based upon CFA text.
McLeod? you know this stuff up and down. give it to us!
just to muddy the waters further…CFAI text gives little time to acute inefficiencies…basically saying they are transient and quickly arbed away…they go on to be much more specifiac about several sources of chronic inefficiency I felt pretty confident about chronic but it may just be an overconfidence heuristic
^says the mayor of lurkerville of hijack state