Behavioral Finance - Biases

CFA Level III Portfolio Management
#1

If X purchased shares of a company at $20. The shares currently trade at $7.50 and the company’s prospects have further worsened. If he chooses not to sell the investment now, he most likely exhibits:

  1. Loss Aversion

  2. Framing

  3. Conservatism

#2

I am no expert in BF. But I will still attempt

The answer is 1

#3

Classic example of 1. If you have doubts it is 3, I would recommend to insert “$25” instead of “$7.5” and “but the company prospects have worsened”. Then you would have conservatism at its best.

#5

Hi, The answer is Loss aversion. I believe it has to be conservatism as he is fail to update the perception when new information arises.

#6

Where does it say that he’s failed to update his perception?

All we know for sure is that he’s not selling.

#7

thank you, I got your point.

#8

My pleasure.