Behavioral Question

…(something about being too overweight in one security, pg 153 of Schweser book 2). Park advises them, however, to sell some of the position in order to diversify their portfolio. Chen Wang points out to Park that GFTC has fallen 15% from its high, reached several months ago. “We dont want to lose money, so please wait to sell until is comes back.” Chen Wang’s reluctance to sell GFTC until it returns to its earlier high is best described as: A) regret B) anchoring C) loss aversion

C) Loss Aversion Investors are reluctant to accept a loss which causes them to hold onto losers too long.

That’s what I thought too, but the answer is B) Anchoring Explanation. Anchoring for an individual investor refers to a data point or other information that incorrectly influences a decision. I think C) is the better answer

This is what the Schweser online update says On page 154 the the reason why the correct answer is not “Loss Aversion” is because we don’t know what price the stock was purchased at therefore we don’t know for certain if a loss has occurred. All we know is that the stock has decreased from a previous high and it could be that it is still above its purchase price in which case it would currently be trading at profit and not a loss. ( Posted: 2009-01-22) That is a very tricky question

ahhh i see. that is tricky

Thank you for the explanation Jeremy, but that question is terrible.

Absolutely, that question sucks.

The phrase “We dont want to lose money” makes that question particularly terrible.

Bankin’ Wrote: ------------------------------------------------------- > The phrase “We dont want to lose money” makes that > question particularly terrible. I totally agree.

Between the “we dont want to lose money” and how the question is posed “reluctance to sell” cant help but think they are just trying to frustrate you.

Crap.

Guess that’s why they say there are always three answers to a question: Textbook answer, Real world answer and the CFA answer.