CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
An investor owns a growth stock and is convinced its earnings will keep rising. She believes she can predict the stock's price moves because she has researched it deeply and has chosen its timing of purchases well so far, and she makes trades frequently as a result. Which bias is most likely driving her trading frequency?
Illusion of control bias is most likely driving her frequent trading. She believes her research and skill let her influence or predict outcomes, which encourages excess trading. Status quo and endowment biases would lead her to hold rather than trade actively.
- AIllusion of control biasCorrect
- BStatus quo bias
- CEndowment bias
Explanation
Illusion of control is the belief that one can influence or control outcomes, leading to excessive trading and concentrated positions. Status quo bias would imply doing nothing, and endowment bias would imply reluctance to sell owned assets, both opposite to frequent trading.
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
- A portfolio manager attributes all of her past successful stock picks to her own skill and all of her poor results to bad luck. She also tra…
- An adviser wants to reduce the effect of confirmation bias in a client's investment decisions. Which approach is most appropriate?
- An adviser distinguishes cognitive errors from emotional biases when planning how to mitigate each in a client's IPS review. Which approach …
- A behavioral finance proponent argues that markets can be inefficient even when many investors are rational. Which statement most accurately…
- Which recommendation would a financial adviser most appropriately make to reduce the effect of loss aversion on a client's portfolio decisio…
- A portfolio manager reads only research articles supporting her bullish view on a energy stock and ignores reports that point to weakening d…