CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
An adviser wants to reduce the effect of confirmation bias in a client's investment decisions. Which approach is most appropriate?
The most appropriate approach is requiring the client to seek and record evidence that contradicts the investment thesis before acting. This forces consideration of disconfirming information, which counters confirmation bias. Higher turnover or anchoring to purchase price does not address it.
- AIncrease the client's portfolio turnover to reflect new information
- BRequire the client to seek and write down evidence that contradicts the investment thesis before actingCorrect
- CAnchor decisions to the original purchase price
Explanation
Actively seeking disconfirming evidence counters the tendency to favor supporting information. More turnover does not address the bias and may worsen overtrading, while anchoring to cost reinforces another bias.
Did you get it right without looking?
One question tells you little. A timed set on The Behavioral Biases of Individuals shows your real accuracy, how long you take and where you lose marks.
More The Behavioral Biases of Individuals questions
- Which assumption about investor decision making is most consistent with traditional finance rather than behavioral finance?
- An investor refuses to sell a stock that has fallen 30% below her purchase price, saying she will sell once it "gets back to even." Meanwhil…
- Prospect theory, a cornerstone of behavioral finance, differs from expected utility theory most likely because prospect theory assumes that …
- An analyst receives a consensus target price of 80 for a stock and, after her own research indicates fundamental value near 60, issues a tar…
- An adviser distinguishes cognitive errors from emotional biases when planning how to mitigate each in a client's IPS review. Which approach …
- 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 d…