Flashcards in Behavioral flash Cards Deck (19)
Rational view is maintained even when new info contradicts
Slow to update viewpoint
New evidence is sought or used to support an original view.
Ignore contradictory information and always goes with info that supports their thesis
New evidence is classified and interpreted based on past classification or experience.
Error comes from attaching too much emphasis on data covering only a short period of time
Base rate neglect, sample size neglect
Illusion of Control
Individuals incorrectly think they can influence results
Junior at firm owns firm stock and trades it frequently and under diversifies
Selectively remember what was done or known in the past.
You overestimate ability and take too much risk.
Anchoring and Adjustment Bias
Subsequent adjustments for new information are around the initial “anchor” point.
Most work off previous estimates making adjustments insufficient.
Mental Accounting Bias
Money treated differently based on how it is categorized.
Client focuses on dividend for income instead of total return
Data presented order affects the decision.
Creates an excessive focus in short term and trading and failing to properly ID the risk objective
Probability estimates based on ease of recall or too much focus on the info the is readily available
Make decisions based on what is familiar, failing to fully diversify
Hold losers too long
Sell winners too soon
Feel more pain from loss than pleasure from gain
Trade too much
Myopic loss aversion - when ST risk of stock incorrectly leads to an excessively high equity premium in the market, ignoring LT equity returns as favorable
Classic issue with analyst
An unrealistic high opinion of intuitive reasoning/cognitive ability.
PM is 90% sure they will beat the index
They will underestimate risk, overestimate returns, fail to diversify, do excessive trading and have subpar results
Self Control Bias
Lack of self discipline to delay gratification in pursuit of long term goals
Save too little, excessive risk, over allocate to bonds to generate current income for spending or to stocks to make up for under saving
Status Quo Bias
What exists is comfortable, so do nothing
Associated with endowment Bias and regret aversion
No initial rational analysis on how you got there
Ownership increases an assets perceived value
I inherited it 20 years ago, so cannot sell
Fail to make appropriate sales
Thoughtless retention creates inappropriate asset allocation
Regret Aversion Bias
Do nothing out of excess fear that actions could be wrong
Avoid errors of commission while ignoring errors of omission.
Lead to herding and trend following.
Self attribution bias
People take personal credit for successes and attribute failures to external factors outside their control
Ethics. Responsibilities of supervisors.
Recommend procedures that call for continued compliance training for all employees. Just to read a compliance manual and sign is not training and supervisor should test to make sure they understand The manual.
Issuing based on fees to the firm violates Fair Dealing.
Must be provided to all interested clients for whom the securities are suitable.
At a minimum clients must be able to know in advance the level of service they will receive.