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CFA L3 Matheus > Section 1 - R1 / R2 - Behavioral Biases > Flashcards

Section 1 - R1 / R2 - Behavioral Biases Flashcards

1
Q

Types of Biases (List and Describe)

A
  1. Cognitive Errors: Faulty cognitive errors. Related to mental procedures. They are like blind spots.
  2. Emotional Biases: Reasoning influenced by emotions. Related to emotional and/or intellectual predispositions towards certain judgments.
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2
Q

Cognitive Biases (List)

A
  1. Conservatism
  2. Confirmation
  3. Representativeness
  4. Illusion of Control
  5. Hindsight
  6. Anchoring / Adjustment
  7. Mental Accounting
  8. Framing
  9. Availability Bias
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3
Q

Emotional Biases (List)

A
  1. Loss Aversion (Selena Gomez)
  2. Overconfidence (Beyoncé)
  3. Self Control (Frank Ocean)
  4. Status Quo (High School Musical)
  5. Endowment
  6. Regret Aversion
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4
Q

Belief Perserverance Bias (Describe)

A

Tendency to cling to one’s previously held beliefs irrationally. Justified by statistical, information-processing or memory errors.

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5
Q

Conservatism Bias (Description)

A

People maintain prior views or forecasts by inadequately incorporating new information

Consequence: OW old info, UW new info. Slow updates to forecasts.

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6
Q

Cognitive Cost (Concept)

A

Effort involved in processing new info and updating beliefs is termed cognitive cost.

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7
Q

Confirmation Bias (Describe)

A

People tend to look for information that confirms what they already believe.

Consequence: OW in confirmatory information. Consider positive info on existing investment. Hold stocks in ITUB4.

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8
Q

Representativeness Bias (Describe)

A

People tend to classify new information based on past experiences and classifications

Consequence:
- May lead to statistical and info-processing errors.
- Base rate neglect and sample size neglect are examples
- Adopting a view based in unrepresentative data

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9
Q

Base Rate Neglect (Describe)

A

Rate or probability of the categorization is not adequately considered.

Ex: Stereotypes without taking into account the probability of the stereotype occurring.

Correction: Do not ignore laws of probability

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10
Q

Sample Size Neglect (Describe)

A

Assume that small samples are representative of the population (vó do Morandini)

Correction: Do not ignore laws of probability

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11
Q

Illusion of Control Bias (Describe)

A

People tend to believe they can control or influence outcomes when they can not.

Ex: Outcome Lojas Americanas (grandes credores)

Consequences: Trade more than prudent. Inadequately diversification due to concentration of positions as investors wrongly expect to influence outcomes.

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12
Q

Hindsight Bias (Describe)

A

Benefício do Retrovisor. People tend to see past events as having been predictable and reasonable to expect.

Consequence:
- Poorly reasoned decision seem as brilliant move
- Poor results of well-reasoned decisions described as avoidable mistakes
- OW outcome prediction, giving false sense of confidence
- Do NOT rewrite the story

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13
Q

Information Processing Cognitive Errors

A

Systematic biases and mistakes that individuals can make when interpreting and processing information. They can affect decision-making and can be detrimental to accurate analysis and judgment.

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14
Q

Anchoring and Adjustment Bias (Describe)

A
  • Anchor estimates in previously known values, then adjusting up or down

Consequence: You may stick to close to previous forecasts

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15
Q

Mental Accounting Bias (Describe)

A

People treat one sum of money differently from another equal-sized sum based on which mental account the money is assigned to.

Consequence:
- Not getting the full picture.
- Neglect opportunities to reduce risk
- You should treat everything as a portfolio

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16
Q

Framing Bias (Describe)

A

Person tend to answer differently depending on the way that the information is provided to them

Consequence:
- Lose big picture
- Focus too much in specific details
- Willingness to bear risk is influenced, misidentifying risks

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17
Q

Availability Bias (Describe)

A

Rule of thumb / Mental shortcut approach to estimating probability of an outcome based on how easily the outcome comes to mind

Retrievability: Idea comes to mind too quick
Categorization: People gather info from what they perceive as relevant search sets.
Resonance: People are biased by how closely a situation parallels their own personal situation.

18
Q

Availability Bias (Consequences)

A
  • Limit investment opportunities set due to familiar classification schemes
  • Fail to diversify
  • Fail to achieve an appropriate asset allocation
19
Q

Overconfidence Bias (Describe)

A

People demonstrate unwarranted faith in their reasoning and judgment

Consequences: OW returns and UW risks

20
Q

Self Control Bias (Describe)

A

People fail to act in pursuit of their long-term, overarching goals due to lack of self-discipline

Ex: Estudar todo dia para o CFA

21
Q

Status Quo Bias (Describe)

A

People tend to do nothing instead of making a change.

22
Q

Endowment Bias (Describe)

A

People value an asset more when they hold rights to it than when they do not

23
Q

Regret Aversion Bias (Describe)

A

People avoid deciding in action out of fear that the decision will turn out poorly

24
Q

Investor Clasification (Types)

A
  1. Barnewall Two Way: Passive v. Active
  2. Bailard, Biehl, Kaiser: 5 way model (Individual, Guardian, Adventurer, Celebrity)
    - Careful v. Impetuous
    - Confident v. Anxious
  3. Behavioural (PP/FF/II/AA)
25
Q

Individualist Investor (BBK types)

A
  • Easy to advidce
  • Process info rationally
26
Q

Adventurer Investor (BBK Type)

A
  • May hold undiversified portfolio
  • Make its own decisions
  • Not accepting advice
27
Q

Celebrity Investor (BBK Type)

A
  • Recognize limitations
  • Willing to seek advice
28
Q

Guardian Investor (BBK Type)

A
  • Concerned about protecting assets
  • May seek advice
29
Q

Behavioural Investor Types (List)

A
  1. Passive Preserver (Emotional)
  2. Friendly Follower (Cognitive)
  3. Independent Individualist (C)
  4. Active Accumulator (E)
30
Q

Passive Preserver (Behavioural Characteristics)

A
  • Emotional
  • Emotional Biases: Endowment, Loss Aversion, Status Quo, Regret
  • Cognitive Biases: Mental Accounting, Anchor
31
Q

Friendly Follower (Behavioural Characteristics)

A
  • Cognitive
  • Emotional Biases: Regret Aversion
  • Cognitive Biases: Availability, Hindsight, Framing
32
Q

Independent Individualist (Behavioural Characteristics)

A
  • Cognitive
  • Emotional Biases: Conservatism, Availability, Confirmation, Representativeness
33
Q

Active Accumulator (Behavioural Characteristics)

A
  • Emotional
  • Emotional Biases: Overconfidence Bias (Self-Attribution) and Self Control Bias (Long Term > Short Term)
  • Cognitive Biases: Illusion of Control
34
Q

Behavioural Investor Types (List)

A
  1. Passive Preserver (PP): Financial Security, Wealth Preservation, Slow Financial Decisions
    Ex: Milton
  2. Friendly Follower (FF): Herding behaviour. Overestimate risk tolerance. Cognitive Biases.
    Ex: Minha avó
  3. Independent Individualist (II): Strong willed, independent. Willing to hear advice.
    Ex: Pati
  4. Active Accumulators (AA): Most Aggressive. Entrepeneurial. Tendency to chase higher risk investments.
    Ex: Dandahia
35
Q

Limitations of BIT approach (List)

A
  1. Investors shows both cognitive and emotional biases
  2. Investor shows multiple characteristics of BITs
  3. Behavior changes during life
36
Q

Adviser Client Relationship (List)

A
  1. Adviser understands client’s financial goals
  2. Adviser maintains a systematic approach investing
  3. Adviser invests as client expects
  4. Relationship benefits both sides
37
Q

Portfolio Construction Pitfalls (List)

A
  1. Inertial and Default: Most members do not change investments
  2. Naive Diversification: Heuristic Rules
  3. Investing in the Familiar: Familiarity, Overconfidence, Extrapolation of Past Returns, Framing and Status Quo, Loyalty Effects, Financial Incentives
  4. Excessive Trading: Disposition Effect
  5. Home Bias: Invest in BR
38
Q

Behavioural Portfolio Theory (Concept)

A

Contrary to Mean Variance Portfolio (MVP), Behavioural Portfolio is built layer by layer. Mental accounting bias is present.

39
Q

Remedial Actions to Biases in Analyst Forecasts (List)

A
  1. Prompt accurate feedback
  2. Reward accuracy
  3. Document a decision & reasons for judgment
  4. Provide counterargument: reduce confirmation, overconfidence
  5. Minimize non-comparable data
40
Q

Committee Decision Biases (List)

A
  1. May mitigate or worsen biases
  2. Social Proof Bias
  3. Reunite people with relevant skills and experiences
  4. Create a culture of tolerance for dissenting views
41
Q

Market Anomalies (List)

A
  1. Momentum: Future prices behavior correlates with that of recent past.
    - ST underreaction: disposition effect
    - LT overreaction: availability bias (extrapolate)
  2. Bubbles and Crashes: overconfidence, confirmation, self attribution, regret aversion, illusion of knowledge and hindsight.

CFA L3 Matheus (18 decks)

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