CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
An investor sees that a fund's manager has delivered strong returns in each of the past three years, and concludes the manager has exceptional skill and will continue to outperform, without considering how many funds exist or the short sample. This conclusion most likely reflects which information processing bias?
This is representativeness bias, in the form of base-rate neglect and sample-size neglect. The investor classifies the manager as skilled from three good years, ignoring how many funds exist and how small the sample is. Mental accounting and framing do not explain this inference.
- ARepresentativeness bias, specifically base-rate neglect and sample-size neglectCorrect
- BMental accounting
- CFraming bias
Explanation
Representativeness leads people to classify a manager as skilled from a few good results, ignoring base rates (many funds, some lucky) and tiny sample size. Mental accounting involves treating money differently by category. Framing involves the way information is presented.
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