Which bias (out of anchoring, hindsight, regret aversion, representativeness, status quo, would the below question reveal about a client:
Would you sell a recent equity investment following a management announcement of a significant decline in the expected growth rate of revenue?
The answer lists anchoring and the explanation given is: Anchoring is the tendency to continue using information that had been used in past decisions despite the availability and relevance of new information. As a result, investment decisions become difficult to reverse when the new information indicates that a change is advisable.
I thought this was more representativeness bias, given they are using a small sample (1 management announcement) to determine whether they would sell an equity investment. Any thoughts?
The key is how the question is framed. In this case, I wouldn’t think it’s ‘Representativeness’ because of ‘significant decline’. But could yuo explain why it isn’t Status quo? Thanks.
Actually achorning is more resonable to me, representativeness is more likely to occur when you made a decision based on too recent update (base neglect ). The news here came from the management and its a reliable source. think what will happen to the stock after the management annoucneted the new update? the stock will probably decline. So you better adjust your holding by selling the share not to stick with your biased information.
Representativeness is more-so giving your info more justification than supported, so I initially went with that but this info SHOULD be given a lot of value. I guess the key is that the growth rate here may still justify the valuation, so just because it’s decreased from where it previously was expected to be doesn’t mean the stock should be sold.
This is CFAI 2012 mock, question 4A. Still thinking this is more representativeness given they use a small sample (1 management announcement) to determine whether they would sell an equity investment).
I can now see why it is anchoring. The question is asking ‘what would the answer indicate about the investor’…not what would it indicate if they traded.
If they didn’t sell then this would indicate anchoring as they are too fixated on their first opinion of a winning stock. If they did sell then this could indicate base rate neglect.
The bias is leading towards anchoring as it would be a suprise not to sell an equity investment if there was a manager announcement of a decline…
That’s a smart a$$ question with a nice twist. I would have it wrong in the exam.
The traditional scenarios involve management exaggerating their expectations. Here you need to be careful as this might be driven by management desire to show overoptimistic biased results. But when the management announce bad expected results, we need to pay more attention. The new information is of high impact, and presumably high credibility.
This is a sort of the questions that you are 100% sure you had them right, but the reality is that you were brutally GIPS-ed by the questions.
Anchoring - CHANGE is advisable - but you don’t act
Conservatism - NEW data not incorporated in original forecast
Representativeness - (look for quantity of data) SAMPLE data overused or underused
I guess I’m saying we should look at the quality of new information presented too. Say it’s compelling, then it’s probably associated with anchoring…my .02