87. Behavioral Biases of Individuals

Question 1

Cognitive errors

Answer 1

• From faulty reasoning / irrationality
• Can be reduced by increased awareness, better training, more info

Question 2

Emotional bias

Answer 2

• From feelings, impulse, intuition

Question 3

[Cognitive] Belief Perseverance

Answer 3

Irrational reluctance to change prior conclusions / decisions

Question 4

Cognitive dissonance

Answer 4

• Holding conflicting beliefs
• Income of info that conflicts with current belief

Question 5

Conservatism bias

Answer 5

When market fails to adjust view with new information

Question 6

Confirmation bias

Answer 6

Only intaking information that supports previous judgement whilst disregarding others

Question 7

Representativeness bias

Answer 7

Certain characteristics are used to put investment in a category - individuals believe it will then carry characteristics of that category

Question 8

[Representativeness] Base-rate neglect

Answer 8

Analyzing an individual member without looking at % of commoness of that member within population

Question 9

[Representativeness] Sample-size neglect

Answer 9

Making classification based on small / unrealistic sample

Question 10

Illusion of Control Bias

Answer 10

Market participants believe they can control outcomes when they cannot

Question 11

Hindsight bias

Answer 11

Selective memory of past events and individual seeing things as more predictable than they are

Question 12

[Cognitive] Information-Processing Bias

Answer 12

More related to info processing than decision making

Question 13

Anchoring and adjustment bias

Answer 13

Basing expectations on a prior number

Question 14

Mental accounting bias

Answer 14

Viewing money in different accounts different when making decisions
ex) Investing bonus money into risky stocks because they perceive it to be less critical

Question 15

Framing bias

Answer 15

Decisions affected by the way in which the question is framed

Question 16

Availability bias

Answer 16

Putting undue emphasis on information that is available and easy

Question 17

[Emotional] Loss-aversion bias

Answer 17

Feeling more pain from loss than pleasure from equal gain

Question 18

[Emotional] Overconfidence bias

Answer 18

Overstimation of their own intuitive ability or reasoning

Question 19

[Emotional] Self-control bias

Answer 19

Individuals lack self-discipline and favor short-term satisfaction over long-term goals (hyperbolic discounting)

Question 20

[Emotional] Status quo bias

Answer 20

When comfort in existing situation causes resistance in change

Question 21

[Emotional] Endowment bias

Answer 21

Assets are felt to be more valuable because they are already owned

Question 22

[Emotional] Regret-aversion

Answer 22

Market participants do nothing out of fear that action could be wrong

Question 23

Persistent anomaly

Answer 23

Value stocks have steadily outperformed growth stocks - adding risk factors for firm size / book to market ration eliminated value stock performances