The recent bubble in the tech stock prices resulted in stock valuations not justifiable by even the most optimistic fundamental analysis. However, it was difficult to exploit the stocks’ mispricing because individual investors keep bidding up prices as they expected the trend to continue. which bias is this?
Representativness?
I think it’s representativeness as well. I would add “anchoring” to it, as the investors are not considering the new info available about the stocks (fundamentals).
happyking02: Its difficult to answer without option but I’ll go with Convoy Behavior…
rp77, I wrote “herding behavior” when I first saw the question. but the correct answer is “Representativeness”. This is one of the AM questions where you have to write (not select) the behavior types.
hah i was thinking the answer would be the ebullient cycle for some reason.
ebullient cycle is the “unopened envelope syndrome”, so it should be for this case?
I think it is " price-target" revision bias.
I think Representativeness fits well. This is a case of the “Winner-Loser” effect, where people underestimate the eventual reversion to the mean. It is not anchoring, definitely. The premise is that positive surprises are followed by more positive surprises. It serves as a smoothing effect, as opposed to a momentum generator. Convoy behaviour is a chronic inefficiency stemming from representativeness. Ebullient cycle is another chronic inefficiency that describes the correlation of investor emotions with market performance. This links with the ‘emotional time line’, in which as markets go up, investors become more hopeful, increase their risk tolerance and bid prices up irrespective of the actual risk. I guess that there is some level of ambiguity, although I believe it is important to differentiate between behavioural biases and their manifestations.