Behavioral biases - CFAI website Qs

CFA Level III Portfolio Management
#1

Hello, would anyone mind explaining why hindsight bias doesn’t apply here and only availability bias does? Thanks!

Koval asks Mayer about adding new asset classes to the taxable portfolio. Mayer suggests emerging markets equity given its positive short-term excess return forecast. However, Koval tells Mayer he is not interested in adding emerging markets equity to the account because he is convinced it is too risky. Koval justifies this belief by referring to significant losses the family trust suffered during the recent economic crisis.

Q. Koval’s attitude toward emerging markets equity reflects which of the following behavioral biases?

  1. Hindsight bias
  2. Availability bias
  3. Illusion of control
#2

Hindsight bias is when the probability of an outcome appears to be much more obvious looking back in time, than it did when events were unfolding real time. For example, predicting the V-shaped market recovery we have seen since March which has been driven by extensive government stimulus.

Availability bias is when the probability of an outcome is given more weight due to the ease of being able to recall or source the relevant information. Personal experiences (especially painful ones) are a typical flag for this bias

1 Like
#3

Thank you!