Book 2 page 154 … Chen Wang points out to Park that GFTC has fallen 15% from its high, reached several months ago. “We don’t want to lose money, so please wait to sell until it comes back.” … Question is: Chen Wang’s reluctance te sell GFTC until it returns to its earlier high is best described as: A. reget. B. anchoring. C. loss aversion The answer is B. But according the definition of loss aversion: investors prefer larger uncertain losses to smaller certian loses. Why C is not the best answer according to the definition? Anyone have sense about this? Thank you!
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.
BTW - taken from schweser errata, not my opinion personally I think that the statement “we dont want to lose money” is pretty much the most straight forward way of saying that the stock is trading below the purchase price.
This one threw me off too…
Disagree, and don’t understand the explanation. I agree that it should be Loss-Aversion from reading the question and the LOS explanation in Schweser.
I think this is a form or anchoring where the client always “resets” the stock price at the last high. So in this case they could have bought the stock at 5, it went to 30 then dropped to 20. In their mind they have “lost” money because they have stupid behavioral biases. A pk points out we DON’T know what they bought it for. No doubt a really crappy question. I highly doubt CFAI will be that vague, but then again this is level III…
"Chen Wang points out to Park that GFTC has fallen 15% from its high, reached several months ago. ‘We don’t want to lose money, so please wait to sell until it comes back.’ " “'Loss aversion refers to the individual’s reluctance to accept a loss. A stock may be down considerably from its purchase price, but the investor holds on to it hoping that it will recover.” I don’t know how it gets any clearer than that…
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“'We don’t want to lose money, so please wait to sell until it comes back” ^That means a loss…
Dwight Wrote: ------------------------------------------------------- > “'We don’t want to lose money, so please wait to > sell until it comes back” > > ^That means a loss… Maybe. Or they think they have a loss because it is down from highs. I have plenty of clients like this. If we had a definitive purchase price the answer would be simple.
I got this wrong as well… bad question… I personally think it should be loss aversion.
How about by process of elimination then? “Regret is the feeling (in hindsight) associated with making a bad decision.” - Doesn’t apply in this case. “Anchoring refers to the inability to fully incorporate (adjust) the impact of new information on projections.” - There is no new information given, no new projections made. Loss aversion is clearly the best answer.
Don’t get me wrong. I choose loss aversion too. I am trying to figure out their thinking, not defend it.
mwvt9 Wrote: ------------------------------------------------------- > Don’t get me wrong. I choose loss aversion too. > I am trying to figure out their thinking, not > defend it. I know. I understand their thinking, but I think it’s just plain wrong.
Has anybody sent the question to schweser for clarification? I will if nobody has yet. Anybody know the number in q-bank?
Additionally, I don’t think the purchase price is relevant in this case. The important thing is that the client thinks they lost money, and want to hold on to the stock until it recovers. Loss aversion.
That thinking contradicts the definition you posted though Dwight. “'Loss aversion refers to the individual’s reluctance to accept a loss. A stock may be down considerably from its purchase price, but the investor holds on to it hoping that it will recover.” Purchase price is included.
Geez. Reading it again, maybe it doesn’t. I hate this crap.
Trying to figure out irrationality is by definition, not possible.
The question is in the books. Schweser Book 2, page154.