Does anyone have a good overview of the biases, a description and an example? I have the feeling in the sample exams they mess them up sometimes… So not all of them are clear to me. Example: Taking a long position since market has had positive returns in last quarter. In an old CFA exam that’s referred to as the status quo bias since they expect returns to continue positively while in Schweser Book 1 exam 1 (AM) they call it representative bias because investor expects past to represent the future. So I need a good and definitive list with good examples so I don’t give away these easy points (which I am doing now). Thanks in advance!
The examples you cite there are so far as I’m aware synonmyms for the same thing? Overall, certainly given my schweser exam practive experience behavioural finance sucks donkey balls, and there’s about 5 possibilities for any given answer. I will do my first cfa paper today. Hopefully these are clearer and more ‘one or the other’.
I always fail this stupid section. I can usually come up with 2 or 3 possible answers and I always give the wrong one… I’d love to hear if anyone has found any tricks or tips!
SCARPO Status Quo Bias – things will remain the same Confirming Evidence – Only listen to people and data that agrees with you Anchoring – Keeping your 1st forecast even though different data is out. Representativness – Market going up will still go up. And will go down when going down. Prudence – Keep your forecasts in line with others. Overconfidence – You are the man and always correct because you are an expert. Maybe someone can help differenciate Status Quo vs Representativeness?
Representativeness is not necessarily the current situation, but representative events from the past.
I think you are right. Status quo bias would be if you did nothing to your portfolio even as long term expected returns or your risks/constraints changed. Examples - if you owned tech stocks in 2000 and they ran up from 20% to 50% of your portfolio and you didn’t sell, that is status quo bias. You have a 401k with 70% stock and 30% bonds and you have never changed your allocation or weight and now you are retiring
What about the ‘status quo trap’ with repect to problems forecasting, when there has been a recent upward trend…
From an investment perspective, a heuristic learning process is one in which people develop investment decision-making rules through experiment, trial and error, or personal experience. Rather than research financial statements and other relevant data, individuals form investment rules and make investments using information that is most prominent in the media or otherwise most readily available. The four heuristic-driven bias are: Representativeness is a heuristic process by which investors base expectations upon past experience, applying stereotypes. Overconfidence means that people tend to place too much confidence in their ability to predict, which can lead to surprises. Anchoring-and-adjustment refers to the inability to fully incorporate (adjust) the impact of new information on projections (i.e., conservatism). Aversion to ambiguity can be loosely described as “fear of the unknown.” It refers to the fact that many investors are hesitant to take positions in investments that have unknown probability outcomes.
I routinely mess up status quo vs representativeness, with a little recallability in their for good measure.
Recallability is pretty easy since it usually relates to some sort of disaster - I always get status quo and representativeness mixed up tho.
Heauristic Driven Biases Representativeness Overconfidence Anchoring-and Adjustment Aversion to Ambiguity Frame Dependence Loss Aversion Self Control Regret Minimization Money Illusion Forecaster Defense Mechanism If Only Defense Ceteris - paribus Almost right defense It hasnt happend yet defense Single predictor defense Issues in DC Plans Bounded rationality Status Quo Bias Myopic Loss aversion Endorsment Effect Naive Diversification, 1/n diversification Home bias/ familiarity bias Chronic Market Inefficiencies - Behavioral Ineeficiencies Process versus outcome Herding Behavior Rigis Views ( bayesian Rigidity) Price Target Revisions Correlating emotions with the market (Ebullience cycle)
Self control: use control mechanism - young guys avoid dividend paying; olders avoid spending capital in portfolio regret min: very similar to self control, stay with familious, lack of diversification aversion to ambiguous: momentum, “everyone is on the train, lets jump onto it” - recall Bill Gates’ famous comment when he started MS 
regret: psychological call option by blaming other factors; self-attribution - pleasures are all mine! if only: he blame feds interest increase being the factor that portfolio is making loss myopic loss aversion: focus on short term gain only; fixed income heavily allocated process vs outcome: overemphasize recent performance and let it drive future investment decisions rigid view: hold onto old views (differ from anchoring which may hold onto first information given by others; status quo also setup by others, i.e. DC plan) price target revisions: adjust target with stock price change, momentum correlating emotions with mkt: similar to frame dependent (but FD can heavily related to media information) holders, rebalancers, valuators and shifters: only shifter is a bit tricky – rebalance portfolio to NON MKT events, and institutional investors tend NOT to be one formulaic rebalancing: easy to understand rebalancing using judgmental flexibility: = tactical asset allocation, but more subjective, and institutional investors normally NOT allowed Here you go, most things are here. actually you may find that most CFAI theoretical concepts are based on psycho stuff mentioned here, lol Alchemist1320 Wrote: ------------------------------------------------------- > Heauristic Driven Biases > Representativeness > Overconfidence > Anchoring-and Adjustment > Aversion to Ambiguity > Frame Dependence > Loss Aversion > Self Control > Regret Minimization > Money Illusion > > > Forecaster Defense Mechanism > If Only Defense > Ceteris - paribus > Almost right defense > It hasnt happend yet defense > Single predictor defense > > Issues in DC Plans > Bounded rationality > Status Quo Bias > Myopic Loss aversion > Endorsment Effect > Naive Diversification, 1/n diversification > Home bias/ familiarity bias > > Chronic Market Inefficiencies - Behavioral > Ineeficiencies > Process versus outcome > Herding Behavior > Rigis Views ( bayesian Rigidity) > Price Target Revisions > Correlating emotions with the market > (Ebullience cycle)
Aimee Wrote: ------------------------------------------------------- > Recallability is pretty easy since it usually > relates to some sort of disaster - I always get > status quo and representativeness mixed up tho. Status quo bias should typically be related to some sort of allocation issue. Representativeness is a stereotype based on the past… “if-then”…if mkt has been going up, then it will keep going up. Not sure if anchoring is associated with conservatism. Prudence should be related to conservatism. Now a quizz, if inflation has been rising over the past 3 years and now is 4%, my inflation forecast is 4%, which bias am I exhibiting?
Representativeness. You expect current to extend to future.
This stuff is so vague, and I just made that one up…so I dont know what a guideline answer would be. I think representativeness would be if I assume inflation will keep rising (bc its been going up in the past), note that my forecast of inflation is 4% not higher. in this instance, i would probably put my money on 1) prudence, 2) conservatism, 3) status quo …in that order. now if I threw in a bit about how a government report came out and said that they will print huge amt of paper. and I still kept my forecast the same, then it now becomes anchoring.