Context- Experienced PM has portfolio where they are selling the winners and holding onto losers (obviously Loss Aversion). Junior Assistant tells her that she is going against IPS and is out of balance. PM states “strategy has performed well in the past and the markets will return back to their normal level”. One of the questions asks if it is showing representativeness bias, and the answer is no. How is that possible? Isn’t the definition allowing past events or experiences shape your beliefs?
from what you write here, seems like you are right…
where do u get this question?
This looks more like gambler’s fallacy.
yeah i agree that it looks like representative bias. using a small sample to make decisions. Bias suck and this one is the worst IMO.
LOL How many forums are you going to post this on?
see if u can answer it atleast 1 of them
This is more of Anchoring Bias than representative
Firstly, we don’t know the source material from where this question is coming from.
But here’s my take on it, Representativeness: “A belief perseverance bias in which people tend to classify new information based on past experiences and classifications.” - Straight from the CFA curriculum
At first glance I thought it could also be the Conservatism bias - but this is also incorrect in my opinion.
Given the context of what’s presented it doesn’t seem new information is provided, hence why its niether Representativeness nor Conservatism (in my opinion).
Its more aligned with Gambler’s Fallacy: “A misunderstanding of probabilities in which people wrongly project reversal to a long-term mean.” Again straight from the curriculum.
But i’d also like to emphasize, the question above is a paraphrased question from OP, without knowing the source material, it’s associated credibility and the question exactly how it is asked - the appropriateness of the answer above might change.
Hope this helps.
I thought this scenario sounded familiar. It’s actually an EOC question from Reading 6. Question 11. I went through the EOCs twice so certain things stick out heh. I don’t know whether to laugh or cry about that.
Gambler’s fallacy & Illusion of control
I posted this on Reddit and Analyst Forum. Real funny!!! LOL!!! Seeing how I have 12 analyst forum points I really must spam this site like crazy!! Now I feel so stupid!!!
That’s right…Gambler’s fallacy, thanks! The wording sounds familiar. Is gambler’s fallacy illusion of control? I’ll have to go back to the curriculum…
You could’ve referenced the question section verbatim: EOC, Reading 6, Question 11. Was that so difficult? I guarantee you would’ve received responses far quicker and to the point.
Anyways I really hope you are clear on what representativeness is and what it isn’t. I think everyone know’s you will ace behavioral finance, and I’m glad I could be of help! Since I’m in such a giving mood here’s a few more tips for June 3rd I think you will find extremely helpful.
If you’re going to reference the case in one of your written responses - make sure you reference it correctly, not like the hogwash above. If you don’t understand something on the exam, DO NOT under any circumstance post your question on analyst forum and reddit hoping for someone to solve your problems. Lastly, and I know this might be hard for you, try to keep your nerves in check and avoid running around like a chicken with it’s head chopped off.
If you pass this exam, you owe me a beer!
Best of luck!