CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
Two investors are told about the same fund. One hears 'the fund has a 90% chance of preserving capital' and the other hears 'the fund has a 10% chance of losing capital.' The first invests and the second declines. The bias most likely explaining the different decisions is:
Framing bias best explains the difference. Both investors received the same probability information, but one saw it expressed as a chance of preserving capital and the other as a chance of loss, and the presentation changed their decisions. Hindsight and endowment biases do not apply here.
- AFraming biasCorrect
- BHindsight bias
- CEndowment bias
Explanation
The facts are identical, but the way they are presented (gain versus loss) changes the decisions. This is framing bias, an information processing bias. Hindsight concerns past events, and endowment concerns valuing owned assets more.
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