Regret/Loss Aversion vs Framing/Anchoring

CFA Level III Portfolio Management
#1

I’m looking at a question from CFAI 2012 Essay regarding biases.

=> Would a prior investment decision that resulted in a loss stop you from making a similar decision, even if the new investment appears to be the best alternative?

The solution says Regret Aversion (which makes sense), but I’m confused with anchoring especially because the questionnaire also implies whether he will base his future decisions on past losses (anchor).

#2

Anchoring is more in regards to a ‘price point’ that may be irrelevant. Not so much a past loss or gain or experience.

#3

you also tend to anchor up from a point, not anchor down from a loss.

so with the past loss - it is more regret aversion that stops you from making a similar decision.

#4

How would you differentiate between anchoring and availability, say, when the first thing you’re retrieving is the anchor?

Same goes with loss aversion and anchoring / framing/ availability. Your ‘loss’ perception can be in relation to

  • the anchor (=cost)
  • the frame (=actual cost)
  • retrievability

The information processing cognitive biases seem to all be interconnected (or at least, an argument can be made as such).

#5

Thanks guys. this clears up anchoring vs. regret aversion.

#6

Let me know if these two page table helps you , They give you summary of all Biases

https://drive.google.com/file/d/0B7XTE7r0DHayemRicUJBODBuVVE/edit?usp=sharing

https://drive.google.com/file/d/0B7XTE7r0DHaySE9OWXh4cFNXUEE/edit?usp=sharing

#7

Thanks. It clears it up a little bit. I think I’m good with the anchoring/ framing issue, but I’m not stuck with representative biases. ex. 1: client questionnaire (CFAI 2012. Q4.A.iii) Would you sell a recent equity investment following a management announcement of a significant decline in the expected growth rate of revenue? Here, CFAI says Anchoring (which is true) but also has Representative bias as another option. My option is, the question is merely intended to find out how the client would react to the the new info. So, if he ignores it, then he’s got anchoring bias. But, on the contrary, if he reacts to it (say, he changes his view without any thorough analysis), then he’s got representative bias. ex. 2 : client believes recent downward trend in growth will continue so he doesn’t do anything. Here, the fact that he doesn’t do anything does imply status quo bias. But, the fact that he believes a trend to continue (ie. best fit) should also imply he’s got representative biases. I feel like I’m caught in a real grey area right now. The way I see representative bias is ‘not considering new info enough’ and ‘thinking the recent trend best fits the whole trend’. So imo if a client believes a recent trend (downward/upward), he’s got representative bias issues. Please correct me if I’m wrong.

#8

can anybody clear this up? representative bias vs. anchoring. what’s this question intended for?

#9

How I understand this is that if the client sells a recent equity investment following a negative annoucement then he is reacting to the new information so it should be representative bias…not sure how anchoring would be applicable in this case.

#10

2012 Essay revisited Question 4 (Behavioral Finance)

How is Q.4.A.3. an anchoring bias? I thought anchoring bias is based on an “anchored default value”. What is the anchor in this question?