Comprehensive Mnemonic/Acronym for Behavioral Biases of Individuals

CFA Level III Portfolio Management
#1

First off, the phrase Fama has been used throughout the CFA curriculum (i.e. Fama and French), so it should be familiar to you.

Recognizing that, simply remember this mnemonic:

" FAMA was RICCH (RICH with 2 “Cs”) because he didn’t commit cognitive errors. He also wasn’t one of those LOSERS who suffered from emotional biases."

Now, it’s just plug and play within the framework of the following outline:

I. Cognitive Errors

A. Belief Perseverance Biases (“Subpart 1A”)

  1. R epresenativeness Bias

  2. I llusion of Control Bias

  3. C onservatism Bias

  4. C onfirmation Bias

  5. H indsight Bias

B. Information-Processing Biases (“Subpart 1B”)

  1. F raming Bias

  2. A nchoring and Adjustment Bias

  3. M ental Accounting Bias

  4. A vailability Bias

II. Emotional Biases (“Subpart 2”)

  1. L oss Aversion Bias

  2. O verconfidence Bias

  3. S elf-Control Bias

  4. E ndowment Bias

  5. R egret Aversion Bias

  6. S tatus Quo Bias

One final tip: With the exception of the R’ s ( R epresentativeness Bias and R egret Aversion Bias), each letter is only found in one category, i.e. C’ s, H and I are only in Subpart 1A; F , A’s and M are only in Subpart 1B; and L , O , S’s and E are only in Subpart 2. With respect to the R’s, simply remember that the other “Aversion” bias (loss aversion bias) is an emotional bias; thus, the R"Aversion" bias is also an emotional bias while the remaining R is the one that fits into the outline as a belief perseverance bias.

Hope this helps.

2 Likes
#2

Please realize that mnemonics for the behavioral biases are absolutely of NO USE.

You need to know what the bias means, what does it cause the FMP to do, how do you mitigate the bias, how would you recognize the bias, what questions should you ask to know someone is having the bias … recognize the bias in a conversation. More often that note the bias names will be given and conflicting scenarios which could mean either bias 1 or bias 2 would be thrown at you.

FAMA was RICHH or he was POOOR is of no use then. Or he was a LOSSER … either .

#3

Go easy on him… he was trying to be helpful

#4

Curmedgeon, thanks for sharing. Ironically, I came up with similar ones. FAMA and LOSERS are both identical. My RICCH ones goes as follows:

CCR (the band) is playing In Houston (IH)… The company BP is headquartered in Houston (I work in oil and gas so it’s relevant). BP = Belief Perseverance.

CPK, I disagree. I would say it has SOME use. Similar to the idea of knowing that Loyalty refers to the firm in ethics, whereas Loyalty, Prudence and Care refers to clients. Simple categorization helps answer some of the questions.

A recurring concept in the mocks has been if a client should be adapted to or educated. Categorization of emotional vs. cognitive is half this equation; the other half being high/low SLR.

With you already being a Charterholder, I’m not negating the possible superiority of your approach or insights. Different strokes for different folks I suppose…

#5

cpk123,

As a charterholder, I appreciate your concerns. Personally, I’ve found that organizing the material into a memorable form often serves as a great foundation for gaining a subsequent deeper understanding of the material.

Here is the rest of the outline, incorporating what I view to be the key meaning and the key result of each of the biases. Note that “M” means “Meaning” and “R” means “Result”

I. Cognitive Errors (Moderate when SLR high; Moderate and Adapt when SLR low)

a. Belief Perseverance Biases

i. R epresentativeness – M: overwt. new info./small samples; R: improperly eval. securities/returns

ii. I llusion of Control – M: belief outcomes can be influenced; R: excessive trading/under-diversify

iii. C onservatism – M: maintain views by inadequately incorp. new info; R: hold securities too long

iv. C onfirmation – M: notice confirmation and/or ignore contradiction; R: under-diversify portfolios

v. H indsight – M: belief past results were predictable all along; R: false sense of confidence

b. Information-Processing Biases

i. F raming – M: answer to Q depends on how asked; R: misidentify risk and/or choose suboptimal invest.

ii. A nchoring and Adj. – M: remain anchored to arbitrary initial value; R: fail to revise est. appropriately

iii. M ental Accounting – M: group assets into non-fungible mental accts.; R: inefficient portfolios

iv. A vailability – M: decisions influenced by how easily info. is recalled; R: limit invest. opportunities

II. Emotional Biases (Adapt when SLR low; Moderate and Adapt when SLR high)

i. L oss Aversion – M: strongly prefer avoiding losses to achieving gains; R: sell winners and hold losers

  1. Myopic L – M: combo. of L & evaluating outcomes too freq.; R: gravitate to lower than optimal risk

ii. O verconfidence – M: illusion of know. & self-attribution biases; R: underest. risk/overest. ret.; excessive trad.

iii. S elf-Control – M: fail to act in long-term interest due to lack of self-control; R: save insufficiently for the future

iv. E ndowment – M: value owned asset more than if not owned; R: fail to sell asset to replace w/ better asset

v. R egret Aversion – M: avoid decisions due to fear of being wrong; R: be too conservative, or engage in herding

vi. S tatus Quo – M: do nothing (inertia) instead of making chg.; R: maintain existing positions even if suboptimal