susana

The behavioral finance stuff is a pain. It might help to know that the material was written by a few different authors, hence the cross over terms and different meanings. It's hard to keep all of this stuff in your head at once, but hopefully the real questions will be presented in a fairly straight forward manner. The past exam questions on this aren't that bad and typically list a number of behaviours and ask you to circle and justify rather than identifiy from scratch.

Status quo bias appears twice. From the DC pension perspective, it is that people are just too lazy to change whatever boxes they ticked on day 1 of their employment. This differs from the other use, in psychological traps (i think), where people just assume current events will continue.

Anchoring is more to do with your first opinion on something weighing more heavily despite new information.

One other comment re something above... Representativeness can be thought of as a 'good company' (ie, well managed, socially and ethically responsible, etc) not necessarily representing a 'good investment'.

mcmc

I think some of the issue lies in that there are three kinds of "behavioral finance biases": biases, behavioral sources of chronic market inefficiency, and psychological traps of forecasting.

Apparently, according to Schweser (in the "for the exam" box on p. 83 of the Capital Markets Expectations Chapter), if two traps/sources/biases are effectively the same thing and are explained well, the grader will give you full credit.

For instance, Schweser says that the prudence trap can be explained in terms of regret minimization, so long as you articulate your reasoning well. Now, to be safe, what I'd do is list the behavioral characteristic in the context of the question - e.g. if the problem is talking about forecasting, go with the traps.

Specifically for this questions, I think the difference between the status quo bias and anchoring bias is very clear. Status quo bias is not bothering to analyze new information and simply go with your existing forecast because it is easier and counteracts the fear of regret. Anchoring is during the decision making process, you weight information you get first more than information you get later.

bkballa

Status quo is giving more weight to resent observations. Market was down last year so it is gong to be down next year.

Anchoring is market crashed in 1929 and now I don't wanna invest anymore because I think it will crash again.

Easy stuff guys

Iginla2011

prudence doesn't have a precedent or basis -- just cautious for sake of being cautious
regret-minimization -- has gone through a bad time , wants to avoid further woes



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 09:28PM by janakisri.

mik82

Prudence is you temper your forecasts down because u don't wanna look like an idiot.

Like if I built a model and it said the Apple stock is going to triple in price next year but everyone is saying it will only move up 10%, I temper my forecast down to say 15%



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 09:31PM by JP_RL_CFA.

Darien

u right JP , that's the intent in Sample 1 question

Windjam

”Anchoring is market crashed in 1929 and now I don't wanna invest anymore because I think it will crash again.“



I think this should be recallability trap.

mar350

I think forzajuve got it right. Anchoring is about forecasts, status quo is about allocation of assets.

Forza Inter!

nannan66

nailer Wrote:
-------------------------------------------------------
> I think forzajuve got it right. Anchoring is about
> forecasts, status quo is about allocation of
> assets.
>
> Forza Inter!


Sorry please allow me to correct, we have 6 "traps" to remember, all of them are traps of forecast.

Anchoring trap
Status quo trap
Confirming evidence trap
prudence trap
overconfidence trap
recallability trap

while status quo bias is seen in defined contribution pension allocations.

lcai

Acronym isn't mine, but for TRAPS think O'CRAPS

I have trouble recalling the R (recalability - how ironic), but it helps that TRaps starts with TR and I start thinking about Arnie in Total RECALL, and if you saw Arnie in a dark ally at night, you really would be going O'CRAP.