CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
A portfolio manager sells a stock after a 30% fall and buys shares of a firm featured in many recent news headlines about a rival's spectacular gains, believing its rise is very likely to repeat because he can recall so many similar stories. The bias most likely driving his probability estimate is:
Availability bias best describes this. The manager estimates the likelihood of future gains from how readily vivid, recent news examples come to mind rather than from objective probabilities. Anchoring would involve a starting reference value, and illusion of control involves overestimating influence over outcomes.
- AIllusion of control
- BAvailability biasCorrect
- CAnchoring and adjustment
Explanation
He judges the probability of repeated gains by how easily vivid recent examples come to mind, which is availability bias. Anchoring would require reliance on a specific initial reference number. Illusion of control relates to believing one can influence outcomes.
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