Anyone else notice that in the various exams dating from 2000 - 2006 that the CFAI never uses the specific terms under Frame Dependence in their solutions such as Regret Minimization, Loss Aversion but rather will just state “Frame Dependence”. One example was an investor who didn’t want to invest in international equities because of the negative returns recently experienced in that area. I chalked that up as Regret Minimization where investors will avoid certain investments, which leads to undiversified portfolios. However, the answer key had “Frame Dependence”
it wouldn’t be regret minimization in the scenario: “an investor who didn’t want to invest in international equities because of the negative returns recently experienced in that area” its more likely recalability. that could be aversion to ambuiguity (weak and probaly not for full markts if you wrote that)… not knowing the medium the investor recieved the information it would be hard to chalk that up to frame dependence… I have trouble believe that it is regret minmization but i supose you could make a case.
Recallability is about major crisis/disaster events. Negative returns are not disastrous. Regret Minimization explained in the material as follows (quoted right from SChweser) “Fear of regret can lead to lack of variety in investments” (P.165 End of Chapter Summary) Avoiding International Equities altogether would suffice as lack of variety no? Perhaps they are referring more to hedge funds, and other investment strategies. CFAI answered the original question as “Frame Dependence”.
recallability is recalling recent events (not necessarily disasters or crisis…but the examples they present to make a point are plane crashes)… from CFAI: “Regret is more then the pain of loss. It is the pain asscoiated when feeling responsible for a loss”. SO i go back to my original post - i think this is more a recallability behavioural trait than regret, but still would say regret could be correct. we’re not goign to agree on this one PJ - the joy of ambiguity in the L3.
Actually I’m not stuck in my thought process on this one… I think you’re more correct in your statement… Thanks!