Would you sell a recent equity investment following a management announcement of a significant decline in the expected growth rate of revenue?
Identify the behavioral bias that the diagnostic question is most likely to reveal.
Answer: Anchoring. Anchoring is the tendency to continue using information that had been used in past decisions despite the availability and relevance of new information. As a result, investment decisions become difficult to reverse when the new information indicates that a change is advisable.
Why is not representativeness bias? He may overweight the new information (management announcement of a significant decline in the expected growth rate of revenue), while underweight the base rate (fundamentals would not justify such announcement). He may reclassify the stock as that the company fundamental will deteriorate.
Hmm, that is quite a tough one… I would def. get this question wrong. But here is at least my thinking:
Anchoring: Fixed at a certain price and keep comparing against it. If he maintain their allocation, although this information is released, it could indicate that they are fixed at a certain price. He basically hold on to the investment even when there exist objective data pointing in the opposite direction.
Representative: Ignore past information or ignore new information. The new information “represent” something it doesn’t really, and is based on past experience. In this case it appear to be a relevant source, they dont mentioned anything about past experience (remind him of something/used to be like that etc).