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CFA Level I Exam · The Behavioral Biases of Individuals

Information Processing Biases in CFA Level I

Updated 7 October 2026 · Fact-checked

Information processing biases are cognitive errors where investors use or interpret information illogically. The four to know are anchoring and adjustment, mental accounting, framing and availability. To solve a question, find the behavior in the stem, match it to the bias that describes it, and rule out the two other options.

Understand Cognitive Errors: Information Processing Biases

Behavioral finance splits biases into two groups. Cognitive errors come from faulty reasoning or memory. Emotional biases come from feelings and impulses. Information processing biases are cognitive errors, and they are easier to fix than emotional biases because better information and training can help.

These biases do not come from missing facts. They come from how the investor handles the facts. The investor has the data, but sorts, weighs or remembers it in a distorted way. This is different from belief perseverance biases, where the investor clings to an existing view despite new evidence.

The four biases you need are these:

  • Anchoring and adjustment: the investor fixes on an initial value or piece of information and then adjusts away from it too little. The first number acts as an anchor.
  • Mental accounting: the investor splits money into separate mental buckets and treats each by different rules, instead of looking at the whole portfolio.
  • Framing: the investor's decision changes with how the same information is presented, such as a gain versus a loss.
  • Availability: the investor judges likelihood by how easily examples come to mind, so recent, vivid or personal events get too much weight.

A useful way to tell them apart: ask what went wrong. Stuck on a starting number points to anchoring. Separate buckets point to mental accounting. A different answer to the same facts in different wording points to framing. Over-weighting what is memorable points to availability.

In the exam you will see short scenarios about an investor or an analyst. Your job is to name the bias, and sometimes to pick the best way to reduce its effect.

Key formulas to remember

Anchoring and adjustment
Estimate = initial anchor + insufficient adjustment
The investor starts from a reference such as a past price, a purchase price or a prior forecast and does not move far enough from it.
Mental accounting
Money is treated as non-fungible: separate accounts, separate rules
The investor ignores correlations across accounts, so the overall portfolio may be inefficient. A layered, pyramid-like portfolio of separate goals is a typical result.
Framing
Same facts, different presentation → different decision
The same outcome described as a gain or as a loss can lead to different decisions. For example, a treatment described as having a 90% survival rate is often preferred to the same treatment described as having a 10% mortality rate.
Availability
Perceived probability ∝ ease of recall
Vivid, recent or personally experienced events are judged more likely than the data supports.
Classification rule
Information processing biases = cognitive errors (not emotional biases)
Cognitive errors are generally more correctable through education and better information.

How to solve Cognitive Errors: Information Processing Biases questions

Use this method for any scenario question on information processing biases. It takes under a minute once practiced.

  1. 1Read the last line of the stem first so you know whether you must name the bias, spot the best description, or choose a mitigation.
  2. 2Underline the behavior in the scenario: what did the investor actually do or say?
  3. 3Ask what drove the decision: a starting number, a separate bucket of money, the wording of the choice, or a memorable event.
  4. 4Match the driver to the bias: starting number is anchoring, buckets is mental accounting, wording is framing, memorability is availability.
  5. 5Check the alternatives against the definitions. Eliminate options that describe belief perseverance or emotional biases such as loss aversion.
  6. 6If the question asks for mitigation, choose the action that targets the cause: see the whole portfolio, restate the facts in a neutral way, use broad data, or set independent estimates.
  7. 7Re-read the stem once to confirm your choice fits every detail before you answer.

Quickest way: Four-trigger scan

When to use it: Use when you have about 90 seconds and the scenario clearly describes one behavior.

  1. Scan for a trigger word: past price, first estimate or target (anchoring).
  2. Scan for separate pots, goals or accounts treated differently (mental accounting).
  3. Scan for the same choice described as a gain or a loss, or in different wording (framing).
  4. Scan for recent news, a vivid event or personal experience driving a view (availability).
  5. Pick the matching option. If two seem to fit, choose the one that explains the main decision, not a side detail.

Common mistakes in Cognitive Errors: Information Processing Biases

  • Confusing framing with mental accounting.

    Both involve how the investor thinks about money and outcomes, so they sound alike.

    Fix: Framing is about how a choice is presented, and the decision changes with the wording. Mental accounting is about the investor splitting money into separate buckets with different rules. If the same facts get a different answer because of wording, it is framing.

  • Calling any use of a past price anchoring.

    Students link anchoring only to prices and miss the 'insufficient adjustment' part.

    Fix: Anchoring needs both a reference point and too little movement away from it despite new information. Check that the investor failed to update enough.

  • Treating availability as the same as recency in every case.

    Recent events are a common example, so students assume recency is the definition.

    Fix: Availability is about ease of recall. Vivid, dramatic or personally experienced events count even if they are not recent.

  • Labeling these biases as emotional.

    Students remember that biases affect behavior and forget the cognitive and emotional split.

    Fix: Anchoring, mental accounting, framing and availability are cognitive errors. Loss aversion, overconfidence and regret are emotional.

  • Mixing up belief perseverance and information processing biases.

    Both are cognitive errors, so the labels blur.

    Fix: Belief perseverance is about defending an existing view against new evidence. Information processing is about handling the information itself illogically.

  • Choosing a mitigation that does not match the cause.

    Students pick a generic answer such as 'get more advice'.

    Fix: Match the fix to the bias: view the whole portfolio for mental accounting, restate the facts neutrally for framing, use long-run broad data for availability, and form independent estimates for anchoring.

Worked examples

Example 1

An investor bought a stock at €50. It now trades at €38 after the company cut its earnings forecast, and her analyst's updated valuation is €36. She insists the stock is worth about €49 because that is close to what she paid, and her estimate stays near the purchase price despite the lower valuation and the earnings cut. Which bias best describes her behavior? A. Framing B. Availability C. Anchoring and adjustment

Show the solution
  1. The behavior: she bases her value estimate on the €50 purchase price (about €49) and moves very little despite the €36 valuation and the earnings cut.
  2. The driver is a starting number, the purchase price, with too little adjustment away from it as new information arrives.
  3. Framing would need the same facts presented in different wording, which the stem does not describe.
  4. Availability would need a vivid or recent event driving the estimate, which is not present.
  5. The best fit is anchoring and adjustment.

Answer: C. Anchoring and adjustment

Example 2

A client holds a low-yield deposit as his safe money while borrowing at a higher rate to fund speculative shares in his fun account, treating the two as unrelated. Which bias is this, and what is the best way to reduce it? A. Framing; restate returns as gains B. Mental accounting; review the total portfolio and net position C. Availability; study longer-term data

Show the solution
  1. The behavior: money is split into 'safe' and 'fun' buckets with different rules, even though it is the same wealth.
  2. This is mental accounting.
  3. The fix should target the cause, which is the separate buckets. Reviewing the whole portfolio and net position does that.
  4. Option A addresses wording, which is not the problem. Option C addresses recall of events, which is not the problem.
  5. Option B names the right bias and the matching mitigation.

Answer: B. Mental accounting; review the total portfolio and net position

Exam tips

  • Questions are standalone three-option items, so read all three descriptions and eliminate the two that name the wrong cause.
  • Definitions are the core. Learn one clean sentence for each bias and match the stem to it.
  • Expect distractors from the belief perseverance group and from emotional biases. Check the cognitive versus emotional split first.
  • When a question asks how to reduce a bias, remember cognitive errors respond better to education and better information than emotional biases do.
  • With no penalty for wrong answers, never leave a question blank. A quick elimination still raises your odds.

Practice questions from The Behavioral Biases of Individuals

Cognitive Errors: Information Processing Biases in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cognitive Errors: Information Processing Biases: frequently asked questions

What are the information processing biases in CFA Level I?

They are anchoring and adjustment, mental accounting, framing and availability. All four are cognitive errors where the investor processes or interprets information illogically. You must be able to recognize each from a short scenario.

What is the difference between framing bias and mental accounting?

Framing means the decision changes depending on how the same information is presented, such as a gain versus a loss. Mental accounting means the investor places money in separate buckets and applies different rules to each. One is about presentation, the other is about how money is organized.

Can you give an anchoring and adjustment example?

An analyst forecasts earnings close to last year's figure and adjusts only a little even though conditions have changed a lot. The old figure is the anchor and the adjustment is too small. Holding a stock's value near its purchase price is another common example.

What is availability bias in investing?

It is judging how likely something is by how easily examples come to mind. After a dramatic market crash, an investor may overestimate the chance of another one. The event is vivid, so it gets more weight than the data justifies.