CFA Level II ExamPortfolio Management and Wealth PlanningEasy
A portfolio manager is considering a client who exhibits a strong tendency to anchor to initial price points and is reluctant to sell investments that have fallen below their purchase price. This behavior is consistent with which of the following cognitive biases?
- AAnchoring Bias
- BConfirmation Bias
- CFraming Bias
- DAvailability Bias
Show answer & explanationAnswer & explanation
Correct answer: A. Anchoring Bias
Anchoring bias occurs when individuals rely too heavily on a past reference point (the 'anchor') when making decisions. In this case, the client is anchoring to the initial purchase price and struggling to move past it, even when the investment has declined.
Why the other options are wrong
- B. Confirmation bias involves seeking out information that confirms existing beliefs and ignoring contradictory evidence.
- C. Framing bias occurs when decisions are influenced by the way information is presented, rather than the intrinsic facts.
- D. Availability bias occurs when individuals overestimate the likelihood of events that are easily recalled or vivid in memory.
Anchoring Bias
Anchoring bias is a cognitive bias where an individual's decisions are influenced by an initial piece of information (the 'anchor') regardless of its relevance.
- Often seen when investors anchor to purchase prices.
- Can lead to holding onto losing investments.
- Resisting new information that contradicts the anchor.
Memory trick: A C F A - Anchors Confirm Frames of Availability.