Discus The Behavioral Biases of Individuals

Discus The Behavioral Biases of Individuals
1. Which of the following would most likely be classified as an emotional bias?
A. The investor has difficulty interpreting complex new information.
B. The investor only partially adjusts forecasts when he receives new information.
C. The investor has a tendency to value the same assets higher if he owns them than if he does
not own them.
2. Which of the following would most likely indicate that an investor is subject to an emotional bias?
A. Regularly basing decisions on only a subset of available information.
B. Reacting spontaneously to a negative earnings announcement by quickly selling a stock.
C. Remaining invested in a profitable technology stock even though new information indicates
its P/E ratio is too high.
3. A cognitive error is most likely indicated by which of the following?
A. A client is the chief executive officer of a public company that she founded and insists she will
not diversify her holding of the company stock.
B. The spouse of a now-deceased company founder becomes upset when it is recommended the
portfolio holdings in that company need to be diversified.
C. A client who initially resists recommendations to diversify the portfolio later thanks the
manager for explaining the benefits of diversification.
Discus The Behavioral Biases of Individuals
4. Abby Lane has investments scattered across many different accounts, from bank savings to
before- and after-tax retirement accounts to taxable nonretirement accounts. She has multiple
investing goals ranging from important short-term goals to longer-term “wish list” goals. She
looks at her financial assets and views each holding as designed to meet specific goals. Lane has
been very successful in her investment decisions for several decades and believes she can
continue to achieve reasonable results. Lane most likely exhibits:
A. framing bias.
B. mental accounting.
C. overconfidence bias.
5. Twenty years ago, Jane Ivy set up her initial asset allocation in her defined contribution plan by
placing an equal amount in each asset class and never changed it. Over time, she increased her
contribution by 1% per year until she reached the maximum amount allowed by law. Due to her
steadfastness and good fortune, coupled with matching funds from her employer, she now finds
herself in her early 40s with a million-dollar retirement account. Which of the following biases
does Ivy most likely exhibit?
A. Representativeness.
B. Status quo bias.
C. Availability bias.
6. The halo effect suggests that investors tend to overvalue stocks:
A. from their own country or region.
B. with which the investors are most familiar.
C. that have experienced rapid growth and price appreciation.