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

An analyst receives a consensus target price of 80 for a stock and, after her own research indicates fundamental value near 60, issues a target of 76. She justifies it as a small adjustment from the consensus. Which bias is most likely at work, and what is its typical consequence?

Anchoring and adjustment is most likely at work. The consensus target of 80 acts as the reference point, and she adjusts only slightly toward her own 60 valuation, leaving the estimate insufficiently adjusted. Confirmation and self-attribution biases involve evidence selection and outcome attribution, which are not described.

  1. AAnchoring and adjustment; estimates are insufficiently adjusted from an initial reference pointCorrect
  2. BSelf-attribution bias; successes are credited to skill and failures to bad luck
  3. CConfirmation bias; only evidence supporting the initial view is sought out

Explanation

The consensus 80 serves as the anchor, and the adjustment toward her own 60 estimate is too small. This is anchoring and adjustment, an information processing bias. Confirmation bias is about seeking supportive evidence, and self-attribution concerns explaining outcomes, neither being described.

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