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.

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.

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'.

aidebaobao

representativeness making judgements based on sterotype ..................oh a stock that goes up will continue going up

NakedPuts2011

^^ same here....i said herding mentality as it relates to ebulence cycle. They say representativeness....pointed to "trend will continue" as the indicator that it was representativeness that the past would continue.

skycfa

Yeah my clear cut rule right now is "information received"?

=-(

Need a confirmation. Thanks guys!

PS - there was a question in the Schweser practice exam I did a while ago where the trend of a stock was going up despite what the fundamentals say and even the most optimistic forecaster thinks its overbought.

I put ebullience cycle for that and it turns out to be Represenativess. Ugh...



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 07:34PM by Eazy E.

Windjam

mpr4437 Wrote:
-------------------------------------------------------
> status quo is more related to tempering your
> forecast specifically to not deviate from the pack
> too much... think of sheep herding and a black
> sheep trying to conceal its true colors


no this is the prudence trap

please lets all go reread vol 1

Windjammer

status quo is more related to tempering your forecast specifically to not deviate from the pack too much... think of sheep herding and a black sheep trying to conceal its true colors

Unforseen

your definition for status quo is actually anchoring

to give you a hint: status quo is part of the DC pension plan biases and in data analysis traps. F.e. when employees stick with their original allocation even though new funds are added (or want to constant mix them on calendar year rebalancing). Or an analyst says last summer was hot, lots of ice sales, this summer starts hot, so there will be a lot of ice sales.

Anchoring would be: summer is a lot of ice sales but even though this summer is rainy, I still think there is a lot of ice sales.

anchoring is a more present over the curriculim. one key example would be if the analyst receives new information but only revises his old forecast by 10% of the impact of this information.

status quo is more like "happened last time, will happen this time, too".

A basic difference would be to me, that status quo does NOT need new information, if you simply "draw the graph further in its current direction" would be status quo.

And yes, there are no easy cut rules, but usually CFAI will ask only non-overlapping concepts in the available answers (as is promised by Schweser)

hopefully paraguay will sanction this ;-)

bpdulog

status quo : bias to maintain the same ole same ole.............we believe apple will continue to grow ust as it always does

anchoring : bias to give credence to first piece of research analysis: well first paper i read said apple is overpriced so im sticking with that forecast