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

A portfolio manager reviews a client's account that has not been rebalanced for eight years. The client says the allocation is "fine as it is" although it now holds 85% equities against a 60% target, and he shows no strong attachment to any particular security. Which conclusion and recommendation are most appropriate?

The client most likely has status quo bias, passively leaving the portfolio drifted to 85% equities without any attachment to specific securities. The most appropriate response is to document the 60% target and agree a regular rebalancing rule, which removes the need for repeated active decisions.

  1. AStatus quo bias; document the target allocation and agree a scheduled rebalancing ruleCorrect
  2. BEndowment bias; advise selling only the securities with sentimental value
  3. CSelf-control bias; advise reducing current consumption to build savings

Explanation

The client is passively leaving the portfolio unchanged, with no attachment to specific securities, which points to status quo bias rather than endowment bias. A rules-based rebalancing schedule tied to the target counters inertia. Endowment bias requires attachment to particular assets, and the case has no consumption issue, so the other options fail.

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