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

An analyst values a company at 40 per share. After the firm reports earnings that are clearly far above forecasts, the analyst raises the estimate by only a small amount, even though the new information strongly supports a much higher value. This behavior is best described as:

The analyst shows conservatism bias. Conservatism bias leads people to maintain a prior view and revise it too little when new, significant information appears. The small upward revision despite strongly positive earnings news is the typical symptom, unlike availability or hindsight bias.

  1. AConservatism biasCorrect
  2. BAvailability bias
  3. CHindsight bias

Explanation

Conservatism bias is a belief perseverance bias in which people cling to prior views and update them too slowly when new information arrives. Availability bias concerns judging likelihood by how easily examples come to mind. Hindsight bias concerns viewing past events as having been predictable.

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