CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
After a decline in a stock, an investor who owns it pays attention to news about the company's long-term strengths, but she would never have noticed the same details before buying it. She also overestimates how much of the decline she had predicted. Which pair of biases best describes her behavior?
Confirmation bias and hindsight bias best describe her. She favors information supporting her holding, which is confirmation bias, and believes she foresaw the decline more than she did, which is hindsight bias. The other pairs do not match these behaviors.
- AIllusion of control and availability bias
- BConfirmation bias and hindsight biasCorrect
- CConservatism and mental accounting
Explanation
Favoring supportive news about a holding reflects confirmation bias, and overstating how predictable the past outcome was is hindsight bias. Illusion of control and availability, and conservatism and mental accounting, do not match the described behaviors.
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