I posted a similar question a while back but wanted to make sure I get the logic on this. What is the behavioral bias exhibited in this statement? “I do not want to sell any bond in my portfolio for a lower price than I paid for the bond”
Loss Aversion? Seems too easy if you’re asking about it here though.
This type of question shows up occassionaly - the answer is anchoring
I think i remember seeing that somewhere. I don’t really agree with that though. Anchoring has to do with failing to incorporate new information in your decisions or price targets. I could see it being anchoring if it said something about not selling the bond due to bad news coming out about the bond, and not wanting to sell because you still think it is a good bond.
i would guess frame dependence…he is framing his decision based on his purchase price and not looking at current evaluations
Jscott24 Wrote: ------------------------------------------------------- > I posted a similar question a while back but > wanted to make sure I get the logic on this. > > What is the behavioral bias exhibited in this > statement? > “I do not want to sell any bond in my portfolio > for a lower price than I paid for the bond” Jscott brings me back for one more post. This was like a Schweser question that drove me bonkers. In this case though loss aversion would definately apply because he mentions the price he paid. He would be incurring losses for sure. The Schweser question was in reference to not wanting to lose any of the gains someone has made. There was no direct reference to the price so you couldn’t be sure he was actually incurring losses. That’s why they they called it anchoring. But here because there’s a direct cost of the investment I believe loss aversion applies.
it will be anchoring if there was some new information that was not incorporated into decision making process and the investor is unwilling to change his original opinion. Even still, in 9 / 10 questions related to lack of willingness to sell, the answer seems to be loss adversion and not anchoring
Loss aversion. Question specifically states what price he paid and that he isn’t going to sell below that price. The Schweser examples where the correct answer is anchoring don’t state what price he paid only what the previous price was. An investor increased his shareholding in XYZ Limited 6 months ago when the shareprice was $100. The compnay has since performed badly ansd shares are now at $90. The investor tells his advisor “I do not want to sell my XYZ shares until the price is at least $100”. This is anchoring not loss aversion as there is nothing stating what he purchased all the XYZ shares for (if he purchased 900k shares at $1 and 100k at $100 he could still sell 900k shares at $90 each without taking a loss (although for tax reasons he might state he was selling the shares he purchased for $100 each). The reason it is anchoring is that he still believes that the price should be $100 per share i.e. he has anchored to the previous information.
Reference point
That’s what pisses me off about this psychobabble stuff. There really is more than one correct answer and then it degenerates into subjective opinion.
The CFAI questions I’ve seen (past exams) there are multiple correct answers and you have the opportunity to justify your answer. I was looking at one today where you had to name 2, and there were 5 possible answers. I thought it was pretty reasonable, actually.