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CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals

Which recommendation would a financial adviser most appropriately make to reduce the effect of loss aversion on a client's portfolio decisions?

The most appropriate recommendation is to evaluate the portfolio over a longer horizon and focus on overall performance. Viewing the whole portfolio less often reduces the visible sting of individual losses, whereas daily monitoring or selling all losers would reinforce loss-averse behavior.

  1. AEvaluate the portfolio over a longer horizon and focus on overall portfolio performanceCorrect
  2. BCheck individual positions daily to respond promptly to losses
  3. CSell all positions showing losses to remove the source of regret

Explanation

Frequent checking of individual positions magnifies the perceived pain of losses. Evaluating overall portfolio results over a longer horizon reduces the sensitivity to short-term losses and encourages decisions based on the whole portfolio. Selling every loser is itself a loss-averse reaction and ignores fundamentals.

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