This repository has been archived by the owner on Nov 14, 2023. It is now read-only.
-
Notifications
You must be signed in to change notification settings - Fork 7
/
8-the-behavioral-biases-of-individuals.html
190 lines (156 loc) · 9.37 KB
/
8-the-behavioral-biases-of-individuals.html
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
<!doctype html>
<html lang="en">
<head>
<meta charset="utf-8">
<title>Study Session 3 | Reading 8 | The Behavioral Biases of Individuals</title>
<meta name="description" content="Chartered Financial Analyst Level 3 Study Materials">
<meta name="author" content="MacLane Wilkison">
<meta name="apple-mobile-web-app-capable" content="yes" />
<meta name="apple-mobile-web-app-status-bar-style" content="black-translucent" />
<meta name="viewport" content="width=device-width, initial-scale=1.0, maximum-scale=1.0, user-scalable=no">
<link rel="stylesheet" href="css/reveal.min.css">
<link rel="stylesheet" href="css/theme/default.css" id="theme">
<!-- For syntax highlighting -->
<link rel="stylesheet" href="lib/css/zenburn.css">
<!-- If the query includes 'print-pdf', use the PDF print sheet -->
<script>
document.write( '<link rel="stylesheet" href="css/print/' + ( window.location.search.match( /print-pdf/gi ) ? 'pdf' : 'paper' ) + '.css" type="text/css" media="print">' );
</script>
<!--[if lt IE 9]>
<script src="lib/js/html5shiv.js"></script>
<![endif]-->
</head>
<body>
<div class="reveal">
<!-- Any section element inside of this container is displayed as a slide -->
<div class="slides">
<section>
<h1>Reading 8</h1>
<h3>The Behavioral Biases of Individuals</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">AlchemistsAcademy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Introduction</h2>
<ul>
<li>Behavioral finance micro (BFMI) - examines behavioral biases of individual investors</li>
<li>Behavioral finance macro (BFMA) - detects and describes market anomalies</li>
</ul>
</section>
<section>
<h2>Categorizations of Behavioral Biases</h2>
<ul>
<li>Cognitive errors - biases based on faulty cognitive reasoning</li>
<li>Emotional biases - biases based on reasoning influenced by feelings or emotions</li>
<li>Cognitive errors can be corrected or modified while emotional biases must often be adapted to</li>
</ul>
</section>
<section>
<h2>Cognitive Errors - Belief Perseverance</h2>
<ul>
<li>Conservatism bias</li>
<li>Confirmation bias</li>
<li>Representativeness bias</li>
<ul>
<li>Base-rate neglect</li>
<li>Sample-size neglect</li>
</ul>
<li>Illusion of control bias</li>
<li>Hindsight bias</li>
</ul>
<aside class="notes">
Belief perseverance bias is the tendency to cling to one's previous beliefs irrationally. It is often associated with cognitive dissonance which is the discomfort that occurs when new information conflicts with previously held beliefs. Conservatism bias is the maintenance of prior view via the inadequate incorporation of new information. Confirmation bias is the tendency to look for and notice things that confirm one's beliefs while ignoring things that contradict one's beliefs. Representativeness bias is the tendency to classify new information based on past experiences and classifications. It often takes the form of base-rate neglect (inadequate consideration of the base probability of a categorization) or sample-size neglect (incorrectly assuming a small sample is representative of the underlying population). Illusion of control bias is the tendency to believe one can control or influence outcomes when, in actuality, they cannot. Hindsight bias is the selective perception and retention of past events.
</aside>
</section>
<section>
<h2>Cognitive Errors - Information Processing</h2>
<ul>
<li>Anchoring and adjustment bias</li>
<li>Mental accounting bias</li>
<li>Framing bias</li>
<li>Availability bias</li>
</ul>
<aside class="notes">
Information processing bias describes how information may be used illogically in decision making. Anchoring and adjustment bias occurs when a psychological heuristic influences the way probabilites are estimated (the inadequate adjustment of an initial "anchor" probability estimate in light of new information). Mental accounting bias is the act of treating one sum of money differently from another equal-sized sum based on which mental "account" the money is assigned to. Framing bias is the tendency for an individual to answer a question differently depending on how it is phrased. Availability bias is the act of taking a heuristic approach to probability estimation based on how easily the outcome comes to mind. It is driven by the retrievability of an answer, the categorization of relevant search sets, a narrow range of experience, and how closely a situation resonates with one's own situation.
</aside>
</section>
<section>
<h2>Emotional Biases</h2>
<ul>
<li>Loss-aversion bias</li>
<li>Overconfidence bias</li>
<li>Self-control bias</li>
<li>Status quo bias</li>
<li>Endowment bias</li>
<li>Regret-aversion bias</li>
</ul>
<aside class="notes">
Loss-aversion bias is the tendency for people to prefer avoiding losses as opposed to achieving gains. Overconfidence bias occurs when people exhibit unwarranted faith in their own intuitive reasoning, judgments, and/or cognitive abilities (this can be intensified in the presence of self-attribution bias, which is the tendency to take credit for one's successes and externalize blame for one's failure). Self-control bias is the failure to act in pursuit of one's long-term goals due to a lack of self discipline. Status quo bias is the tendency for people to do nothing instead of making a positive or needed change. Endowment bias is the act of assigning more value to an asset when they own it than when they do not. Regret-aversion bias is the tendency to avoid making decisions out of fear that the outcome will be poor.
</aside>
</section>
<section>
<section>
<h1>Investment Policy and Asset Allocation</h1>
</section>
<section>
<h2>The IPS and Behavioral Biases</h2>
<ol>
<li>Which biases does the client show evidence of?</li>
<li>Which bias type (cognitive or emotional) dominates?</li>
<li>What effect do these biases have on the asset allocation decision?</li>
<li>What adjustments should be made to to mean-variance based asset allocation to account for these biases?</li>
</ol>
</section>
<section>
<h2>Goals-Based Investing Approach</h2>
<img src="images/8/goals-based-investing-approach.png" alt="illustration of a goals-based investing approach" />
<aside class="notes">
In goals-based investing, the portfolio is evaluated in terms of attaining financial goals and minimizing the probability of losses.
</aside>
</section>
<section>
<h2>Asset Allocation Guidelines</h2>
<p><em>Guideline I</em>: The decision to moderate or adapt to a client's behavior biases during the asset allocation process depends fundamentally on the client's level of wealth. Specifically, the wealthier the client, the more the practicioner should adapt to the client's behavioral biases. The less wealthy, the more the practicioner should moderate a client's biases</p>
</section>
<section>
<h2>Asset Allocation Guidelines (cont'd)</h2>
<p><em>Guideline II</em>: The decision to moderate or adapt to a client's behavioral biases during the asset allocation process depends fundamentally on the type of behavioral bias the client exhibits. Specifically, clients exhibiting cognitive errors whould be moderated, and those exhibiting emotional biases should be adapted to</p>
</section>
<section>
<h2>Asset Allocation Guidelines (cont'd)</h2>
<img src="images/8/asset-allocation-guidelines.png" alt="visual depiction of asset allocation guidelines" />
</section>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
</div>
</div>
<script src="lib/js/head.min.js"></script>
<script src="js/reveal.min.js"></script>
<script>
// Full list of configuration options available here:
// https://github.com/hakimel/reveal.js#configuration
Reveal.initialize({
controls: true,
progress: true,
history: true,
center: true,
theme: Reveal.getQueryHash().theme, // available themes are in /css/theme
transition: Reveal.getQueryHash().transition || 'default', // default/cube/page/concave/zoom/linear/fade/none
// Optional libraries used to extend on reveal.js
dependencies: [
{ src: 'lib/js/classList.js', condition: function() { return !document.body.classList; } },
{ src: 'plugin/markdown/showdown.js', condition: function() { return !!document.querySelector( '[data-markdown]' ); } },
{ src: 'plugin/markdown/markdown.js', condition: function() { return !!document.querySelector( '[data-markdown]' ); } },
{ src: 'plugin/highlight/highlight.js', async: true, callback: function() { hljs.initHighlightingOnLoad(); } },
{ src: 'plugin/zoom-js/zoom.js', async: true, condition: function() { return !!document.body.classList; } },
{ src: 'plugin/notes/notes.js', async: true, condition: function() { return !!document.body.classList; } }
// { src: 'plugin/remotes/remotes.js', async: true, condition: function() { return !!document.body.classList; } }
]
});
</script>
</body>
</html>