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CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals

A client holds a large block of shares in her former employer and refuses to sell, saying she 'knows the company'. The adviser wants to address the bias while preserving the relationship. The most appropriate step is to:

The adviser should show how the concentrated holding breaches the diversification and risk limits in her IPS. This uses an agreed, objective framework to counter familiarity and overconfidence bias, respects the client's authority, and avoids unauthorized trading or reinforcing concentration.

  1. AShow how the concentrated position conflicts with the diversification and risk limits in her IPSCorrect
  2. BSell the shares without informing her, to avoid an argument
  3. CIncrease the position, as her knowledge is a valid advantage

Explanation

The behavior reflects familiarity and overconfidence bias. Linking the position to the agreed IPS risk limits is an objective, client-centered way to mitigate it. Selling without authority breaches duties to the client, and adding to the position worsens concentration.

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