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

After a sharp market fall, a client who sold her equity fund at a loss sees it recover. A year earlier she kept a different fund that then dropped. She now refuses to make any investment change, even though her risk tolerance has fallen, saying she fears feeling responsible for another bad outcome. Her behavior is best described as:

This is regret aversion leading to inertia. Having been hurt by both acting and not acting, she avoids all decisions to escape the emotional pain of feeling responsible for another poor outcome, even though her changed risk tolerance warrants a portfolio change.

  1. ARegret aversion leading to inertiaCorrect
  2. BSelf-control bias leading to overspending
  3. CEndowment bias toward inherited assets

Explanation

Regret aversion is avoiding action to prevent the pain of a bad decision outcome; here it produces inertia and resembles status quo behavior. Nothing in the case concerns spending discipline or inherited holdings, so the other options do not fit.

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