2008 AM - q2 on behavioural biases

[Deksumo]

For those of your that have done the 2008 AM paper, did you find that the answers don’t appear to match the CFAI text?

For example statement 2 is regret aversion bias, but if you read p.79 of Reading 6 it says that FMPs that have experienced sharp losses will not continue investing inthe market. in the Q the FMP bought more shares after further losses - i dont understand how this is regret aversion bias?

As for statement 3, does any one have an explanation of why this is representativeness bias?

Many thanks in advance

[cpk123]

you need to simply READ better.

2nd one they state is REGRET AVOIDANCE - while you have gone with reading the FIRST WORD and assumed REGRET AVERSION.

See the difference that makes.

3rd one - prices have increased in general, average property sold for 1.5 Mill on average last year - SO my property will be a good investment. That the general trends are representative of what will happen to my investment.

[Deksumo]

Thanks CPK123 - i understand the 3rd one now but the 2nd one has opened up a bigger can of worms…

I have flicked through the 2016 curiculum and couldn’t find regret avoidance - could you please point me to where it is in the CFAI text?

Or is regret avoidance a subset of another bias? For example searching through AF some people thought regret avoidance is just a subset of loss aversion…

[cpk123]

it is something that has changed from the 2008 exam … so learn about loss aversion and regret aversion in the current curriculum way.

but if you looked at the diagnostic test for regret aversion

“Regret-Aversion Diagnostic Test Question 1: Suppose you make an investment in Stock ABC, and over the next six months, ABC appreciates by your target of 15 percent. You contemplate selling but then come across an item in the Financial Times that rehashes the company’s recent successes and also sparks new optimism. You wonder whether ABC could climb even higher. Which answer describes your likeliest response given ABC’s recent performance and the FT article? A I think I’ll hold off and wait to see what happens. I’d really “kick” myself if I sold now and ABC continued to go up. B I’ll probably sell because ABC has hit the target I set, and I try to stick to the targets I set.”

A is marked as the answer for the questionnaire response that determine regret aversion. In some way this could manifest itself as buying more even after losses - to make more profits if the shares went up later – or to avoid having regret … later.

[Deksumo]

Thanks for digging that up CPK - much appreciated!