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Flashcards in Behavioral flash Cards Deck (19)
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Cognitive error

Rational view is maintained even when new info contradicts

Slow to update viewpoint


Confirmation Bias

Cognitive Error

New evidence is sought or used to support an original view.

Ignore contradictory information and always goes with info that supports their thesis



Cognitive Error

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

Cognitive Error

Individuals incorrectly think they can influence results

Junior at firm owns firm stock and trades it frequently and under diversifies


Hindsight Bias

Cognitive Error

Selectively remember what was done or known in the past.

You overestimate ability and take too much risk.


Anchoring and Adjustment Bias

Cognitive Error

Subsequent adjustments for new information are around the initial “anchor” point.

Most work off previous estimates making adjustments insufficient.


Mental Accounting Bias

Cognitive Error

Money treated differently based on how it is categorized.

Client focuses on dividend for income instead of total return


Framing Bias

Cognitive Error

Data presented order affects the decision.

Creates an excessive focus in short term and trading and failing to properly ID the risk objective


Availability Bis

Cognitive Error

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


Loss-Aversion Bias

Emotional Bias

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


Overconfidence Bias

Emotional Bias

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

Emotional 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

Emotional Bias

What exists is comfortable, so do nothing

Associated with endowment Bias and regret aversion

No initial rational analysis on how you got there


Endowment Bias

Emotional Bias

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

Emotional 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.


Oversubscribed IPOs

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.


Behavior satisfice

Satisfice - gathering enough (but not all) info to make a reasonable (but not perfect) decision with which the client is satisfied