Learning Module 5 The Behavioral Biases of Individuals

Which of the following best distinguishes a cognitive error from an emotional bias according to Chapter 5's categorization?

A portfolio manager continues to believe a firm will recover despite multiple negative earnings surprises and new adverse industry data. This behavior most closely matches which bias?

Which diagnostic action is most likely to reduce confirmation bias when evaluating an investment thesis?

An analyst extrapolates the success of a biotech's Phase 1 trial to assume a high probability of Phase 3 success, ignoring that few trials reach commercialization. Which representativeness sub-bias does this illustrate?

A retail investor refuses to sell employer stock despite advice to diversify because they believe their inside knowledge ensures future success. This is primarily which bias?

Which behavior is a typical manifestation of hindsight bias for an investment manager reviewing past calls?

An analyst forecasts EPS by starting at last years EPS and applying a small downward adjustment despite evidence of a major industry downturn. This is a classic example of which processing error?

If an investor treats bonus pay, salary, and an unexpected inheritance as separate mental accounts and spends the bonus more freely, what bias are they demonstrating?

Which practical step does the chapter recommend to detect and reduce framing bias when assessing a client's risk tolerance?

Which of the following is NOT a subtype of availability bias discussed in the chapter?

An investor sells a stock after a moderate gain to lock in profits but holds another stock that has lost money hoping it will return to breakeven. This pattern is best described as:

Which test or practice does the chapter suggest to limit hindsight bias in portfolio decision reviews?

Which action is most likely to reveal anchoring bias in a manager who resists selling a security?

A client insists on investing only in companies located in their hometown because they feel more comfortable and 'know' the businesses there. Which bias does this most directly illustrate?

Which of the following is the best single quantitative indicator that a manager might be overconfident, according to the chapter?

An investor refuses to change the allocation to an industry despite a formal IPS because they don't want to 'admit mistake.' Which combined biases are most likely present?

A team uses recent 12-month winners to screen for new buy ideas and finds many attractive candidates in the same sector; they fail to broaden their search beyond that sector. Which bias likely influenced their initial screening?

Quantitatively, which of the following portfolio actions directly counters mental accounting and improves overall diversification?

Which of the following is the most effective governance-level remedy to limit harm from overconfidence across an investment firm?

A fund that avoided tech stocks underperformed peers massively during a tech boom; after the boom burst, the fund outperformed peers. Which behavioral phenomenon described in the chapter may explain investors' initial rush into tech and later panic selling?

Which of the following client statements is a red flag for confirmation bias?

Which mitigation technique is most appropriate to reduce the disposition effect caused by loss aversion?

Which behavioral bias best explains a managers decision to keep a large allocation to a single stock they initiated that subsequently underperformed, because 'it will come back as it always has'?

Quantitative question: A portfolio has 40% in asset A (sigma 20%), 60% in asset B (sigma 10%), and the correlation between A and B is 0.25. What is the portfolio standard deviation (rounded to one decimal place)? Use sigma_p = sqrt(wA^2 sigmaA^2 + wB^2 sigmaB^2 + 2 wA wB rho sigmaA sigmaB).

Quantitative question: A manager is anchored to an initial price of 50 when forecasting year-end price. New information implies a justified forecast of 65. If the manager only moves halfway toward the new information from the anchor, what forecast will they give?

A client is strongly averse to selling a small lottery-like holding that occasionally pays large dividends, even though it underperforms. Which bias helps explain their behavior?

Which of the following best describes how behavioral biases can lead to the momentum anomaly in markets?

Which of these managerial practices is most likely recommended in the text to counter endowment bias among heirs who inherit a specific portfolio?

A risk manager asks: 'Which downside events would cause insolvency, and what tail losses exceed our tolerance?' This exercise primarily addresses which governance concept from Chapter 5?

Which behavioral bias is most likely to cause investors to chase funds that have had strong recent returns, increasing flows into those funds?

Which method is recommended in the chapter to detect whether a client is displaying overconfidence in their own trading skill?

Which of the following reflects a correct application of behavioral insights when designing a client portfolio process?

Which of the following sequences best describes how a bubble forms as discussed in the chapter?

Which behavioral bias is most likely to cause an investor to prefer a guaranteed small gain over a probabilistic larger gain, even when expected value favors the larger payoff?

In the chapters examples, what is the primary difference in how to address cognitive errors versus emotional biases?

Which of the following investor actions would most likely worsen availability bias when searching for investments?

Which behavior best illustrates narrow framing, a subset of framing bias discussed in the chapter?

Quantitative question: Suppose a fund uses a simple risk parity view and wants to equalize volatility contributions. Asset X has volatility 30% and initial weight 40%; asset Y has volatility 10% and initial weight 60%. Which asset contributes more to portfolio volatility currently?

Which bias can make investors sell winners too early, thereby reducing long-term returns, as described in the chapter?

A committee sets a policy that weights must remain within +/- 2% of target and will rebalance when breached. Which bias or problem is this policy designed to mitigate?

Which behavioral bias is most implicated when portfolio managers cite private knowledge of a firm and therefore maintain overweight positions, despite regulatory restrictions allowing no special access?

In a practical mitigation plan, which technique is most consistent with adapting to (not trying to eliminate) emotional biases?

Which bias could prevent a client from rebalancing after a large market run-up in equities because they prefer not to 'lose out' on further gains?

Which detection question from the chapter is most useful to discover representativeness (sample-size neglect) in a colleagues bullish forecast based on a few months of data?

A manager who attributes good outcomes to skill and bad outcomes to bad luck is demonstrating which bias?

Which market anomaly discussed in the chapter is most likely to be reduced if many investors adopt disciplined rebalancing and rules-based investing?

A senior analyst claims their recent correct calls prove their method is superior. What behavioral trap should a reviewer be wary of when hearing this claim?

Which bias can cause an investor to under-diversify because they overweight industries they perceive they 'understand'?

Quantitative question: An investor's portfolio has 30% in equities with sigma 15% and 70% in bonds with sigma 5%. If equity and bonds correlation is -0.2, compute portfolio sigma (rounded to two decimals).

Which of the following best summarizes the chapters recommended first-line approach to recognizing and reducing behavioral bias in financial decision-making?