Reference Dependence

Ok so I think this has been talked about before but can someone clear this up for me, it seems schweser references loss aversion but looking at past cfai exams they refer to it as reference dependence. Which one should we be using on the exam and are they the same? -Thanks.

there’s frame dependence and loss aversion and aversion to ambiguity in this years exam.

ok so no reference dependence good deal, can someone give an example of frame dependence I am having some trouble with that one?

if you stick to the wording of each LOS: + representativeness, overconfidence, anchoring, aversion to ambiguity: These are herustic-driven biases + self-control, regret minimization, money illusion: These are are examples of frame dependence + loss aversion: this itself is a separate LOS, but schweser mentions that is included in frame dependence (page 161) and cfa text more or less agrees (page 16, just when talking about loss aversion, they say "provide evidence of frame dependence) So, in theory, we will face in the exam some questions only on this ones (plus those of defined contribution plans + those of analyst justifiying their mistakes). The problem is that every schweser problem and every old cfa exam mixes them with old terms or biases not covered in this year´s curriculum…

here is an example You watch a lot of news on TV, and constantly hear about people dying from violent crimes, so association of people dying from violent crimes becomes your mental frame. Then someone asks you a question, do you think more people in a year die from viloent crimes or smoking sigarets? Asume, you don’t really know statistics, so you really don’t know the answer to that question. However, instead of using logic and reasoning, like much more people are exposed to sigartes, all the dangers of smoking, etc., you just go to the frame you formed by watching news on TV and say that more people die from violent crimes, which obviously is wrong.

volkovv Wrote: ------------------------------------------------------- > here is an example > > You watch a lot of news on TV, and constantly hear > about people dying from violent crimes, so > association of people dying from violent crimes > becomes your mental frame. > > Then someone asks you a question, do you think > more people in a year die from viloent crimes or > smoking sigarets? > > Asume, you don’t really know statistics, so you > really don’t know the answer to that question. > However, instead of using logic and reasoning, > like much more people are exposed to sigartes, all > the dangers of smoking, etc., you just go to the > frame you formed by watching news on TV and say > that more people die from violent crimes, which > obviously is wrong. is int it called in 2008 CFAI an availability / representativeness bias? I might be wrong

csk is right, “availability heuristic”

I agree that my example is better suited to what CFAI calls “availability heuristic” However, the concept of availability heuristic, is still based on the notion that your brain is framed based on the information you are surrounded with. In my example, information that you hear on the news acts as the frame. The idea of Frame Dependence, was one of the central ideas in Kahneman’s and Tversky’s in their prospect theory work (btw a very good read but after June 7th). http://nobelprize.org/nobel_prizes/economics/laureates/2002/kahnemann-lecture.pdf The issue of framing is a broad concept, CFAI chose to present it in the context of “Lose Aversion” and “Hedonic Editing”, which is perfectly fine, but it is not inclusive to these concepts only. This may be heresy as far as exam is concerned though…