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

An analyst is asked to give a 90% confidence interval for next year's index return and provides a range of 6% to 8%. Actual outcomes over many years fall inside such ranges only about half the time. This result is most consistent with which form of overconfidence?

The result is most consistent with prediction overconfidence. The analyst sets confidence intervals too narrow, so a nominal 90% range captures outcomes only about half the time. This reflects overestimating the precision of one's forecasts rather than illusion of control or attributing outcomes to luck.

  1. AIllusion of control
  2. BPrediction overconfidence, in which confidence intervals are too narrowCorrect
  3. CSelf-attribution of outcomes to luck

Explanation

Prediction overconfidence means setting confidence intervals too narrow, so realized outcomes fall outside them more often than the stated confidence implies. Illusion of control is the belief one can influence outcomes, and attributing outcomes to luck is the opposite of the self-attribution pattern seen in overconfident people.

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