CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
An investor sees that her new holding has lost value, which conflicts with her self-image as a skilled stock picker. To relieve the discomfort, she focuses on the few reports that praise the company and ignores the others. Which description is most accurate?
She is showing cognitive dissonance, the discomfort of conflicting information about her skill, and she resolves it by favoring supportive reports, which is confirmation bias. Loss aversion and availability bias do not explain the selective use of evidence to protect a self-image.
- AShe is exhibiting cognitive dissonance, which can lead to confirmation biasCorrect
- BShe is exhibiting loss aversion, which is an emotional bias unrelated to beliefs
- CShe is exhibiting availability bias, which arises from ease of recall
Explanation
Cognitive dissonance is the mental discomfort from holding conflicting beliefs or facts. People reduce it by favoring supporting information, which is confirmation bias. Loss aversion concerns the greater pain of losses, and availability bias concerns recall ease, and neither explains selecting only favorable reports to protect self-image.
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