Cfa exam 2007 essays question no question 3

CFA Level III
#1

Question 3 asking for psychological trap for Hyatt…overconfidence trap can be one of it.

#2

Nultione -

  • uses evidence of 3 analysts who agree with his optimistic forecast - confirming evidence
  • Nultione remembers similar conditions several years ago when his forecast was too pessimistic and he missed a significant buying opportunity. He does not want to miss another market low. - Recallability Trap
  • Nultione proposes a large increase in EA’s portfolio allocation to U.S. equities, which will move his position from underweight to overweight.- Overconfidence trap

Hyatt

  • presented with evidence that variables have changed - but still sticks with forecast - Anchoring trap
  • Hyatt believes the recent downward trend in the market will continue, and any gains from restructuring EA’s portfolio allocation would not be worth the risk of relative underperformance. - Status Quo
  • Hyatt believes that Nultione’s proposed portfolio allocation could result in a significant underperformance of EA’s portfolio compared to its peers. Hyatt believes such underperformance could harm his own position at the firm. - Prudence (not worth changing the forecast).
#3

Why is status quo an answer but conservatism is not?

#4

Psychological traps = ASCORP

  • A-Anchoring
  • S=Status Quo
  • C=Confirming Evidence
  • O = Overconfidence
  • R=Recallability
  • P=Prudence

Conservatism is one of the behavioral Cognitive biases, not a Psychological trap…

Yes it is insane :slight_smile:

#5

So in pre-2012 parlance, psychological traps = information processing biases?

#6

no.

psychological trap is coming from the CME chapter. not the behavioral finance material per se.

and these are the 6 that are mentioned there.

and the question clearly identifies as “which psychological” traps …

#7

Oh! I better go back and reread CME.

#8

Nice catch cpk on the ‘psychological’ keyword…that is a good thing to look for.

A couple other things I’ve noticed in the morning exams.

  1. the ‘true’ behavioral finance material is typically tested in the individual IPS questions. CME bias are either tested seperately (like in 2007) or with other CME material.

  2. several of the biases are the same, but with slightly different names (i.e. Availability / Recallability). For what it is worth, Schweser says you can use these interchangably when writing your answers.

#9

So we have more distinction here

1) Psychological Traps -

ASCORP (Anchoring, Status quo, Confirming evidence, Overconfidence, Recallability, Prudence)

2) Emotional Biases -

LOSSSER

(Loss aversion, Overconfidence, Status Quo, Self-attribution, Self-Control, Endowment, Regret Aversion)

3) Cognitive Error

CFA-CA-HRCM

CFA (Confirmation, Framing, Anchoring & Adjustment)

CA (Conservatism, Availability

HRCM - (Hindsight, Representative, Control, Mental accounting)

or

HCCR - FAMA

HCCR - All cognitive belief preseverance - (Hindsight, Confirmation, Conservatism, Representativeness)

FAMA - All cognitive information processing - (Framing, Anchoring & Adjustment, Mental Accounting, Availability)

Many overlaps…really tough to discern…that too during the exam time…@$!

#10

Dumb question but what does CME stand for and where in the book is it? Thanks

#11

CME is Capital Market Expectations…

#12

I would look for what the market participant is . If individual , then emotional or cognitive . If analyst then could be the CME related stuff . If committee then could be first type again

#13

Can u please throw some more lights on this…

#14

CPK et. al – I reviewed the CME book last week and actually was wondering if they changed this chapter for 2012, given the extensive changes to the Behavioral Finance section. I would look myself but last I checked the finquiz side by side was down and i didn’t print it.

Thanks in advance.

#15

The CME chapter did not change from last year.