CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
An investor inherited a large block of shares in her family's former employer. Her adviser shows that the holding is poorly diversified and recommends selling part of it, but she refuses because "these shares have always been in our family." Her behavior is most likely an example of:
This is endowment bias. The investor values the inherited shares more because she owns them and they carry family sentiment, not because of their investment merit. Loss aversion and regret aversion would involve fear of losses or of a poor decision, which the scenario does not describe.
- AEndowment biasCorrect
- BLoss aversion
- CRegret aversion
Explanation
Endowment bias is the tendency to value an asset more highly simply because one owns it, often because it was inherited or has sentimental ties. Her refusal rests on ownership and family attachment, not on fear of a realized loss or of a bad decision outcome. Loss aversion concerns the asymmetry of losses versus gains, which is not the driver here.
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