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Bias subtype

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This test was somewhat different from all the others, with four statements to respond to with an agreeableness scale. The first statement was whether or not I invest in firms with likeable products. I answered neutral, as some of the firms that make products I like do have valuable stocks. The second statement asked if I invest in firms that reflect my personal values. Again, I answered neutral, as some happen to and some do not. But again, this is not something I look for. The third statement was if I have many international investments. I answered agree, as I do. The final statement was whether I invested in "sophisticated" firms for social reasons. I answered strongly disagree: I do not invest in a firm purely for what it sells/ produces. The answer guide was more loose than the previous tests, but apparently I do not have affinity bias, as I do not care what a stock's firm does, as long as the stock's valuation is up to certain standards before I buy.

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Causes investors to invest in firms producing products they like, which may or may not be linked to profitability or a valuable stock.
Can manifest as nationalistic tendencies where an investor will refuse to invest in firms located outside their home country. My parents' former financial advisor had this opinion, though I believe it was because in her time few foreign companies were sound investments (she was quite old).
Investments in hot, trendy, socially conscious, or cutting- edge firms with little technical valuation to back them up are often caused by this bias.

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Occurs when an individual invests based on how they think investments will affect their social standing and values, rather than on the valuation of the investment.
Similar to representativeness bias, as individuals use personal and emotional characteristics to evaluate their investments, and are unable to use technical characterization

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Diagnostic Testing Tools- Regret Aversion Bias

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Diagnostic Testing Tools- Regret Aversion Bias

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Again, only three questions. The first two evaluated my actions with stocks that are projected to appreciate or depreciate. For the first question, which asked whether an appreciating stock (with potential to appreciate even more) should be sold for rebalancing, I did not agree with any of the answers. I would see if there were any other stocks I held in the same sector that were doing worse currently, and then I would decide what to sell for rebalancing. The second question, which asked if you would buy a depreciating stock that has solid fundamentals. I said I would continue to buy it, as I go by the technical valuation only. The final question was about whether you would value a mutual fund with a better reputation over a technically similar one with a worse reputation. I was indifferent, showing I apparently do not have regret aversion bias.

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Causes investors to be too conservative, hold on to assets for too long, and fearful in bear markets.
Often causes "herd behavior" with investors feeling less regret if more people invest in what they are investing in.
Investors may prefer stocks from firms they feel are "good" (a feeling that can be caused by a multitude of non- technical factors) rather than evaluating their stocks purely on technical valuation.
Can cause investors to hold on to winning stocks for fear they will miss out on future gains, when the rise in value may be over.

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Tendency for individuals to avoid investing for fear whatever they do will lead to loss.
Like a negative sort of anchoring and adjustment bias, where the "anchor" is that all investments will fail.

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Diagnostic Testing Tools- Endowment Bias

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Diagnostic Testing Tools- Endowment Bias

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This test consisted of three questions with two different answers. The first dealt with selling an inherited stock to rebalance a portfolio. I answered that I would do what was best for my portfolio's balance, which means I do not have endowment bias in regard to inherited assets. The next two questions focused on assets I myself purchased, dealing with fear of transaction costs and then portfolio rebalancing again. I do not fear transaction costs irrationally, and treat them as a (usually small) cost against the total value of the bond (in this case), so I did not mind incurring them. For the final question, I again sold in favor of rebalancing, showing I apparently do not have endowment bias.

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Individuals will hold assets they inherited or were gifted regardless of the valuation of those assets, thinking it will offend the person or people who gave them the asset.
Investors will only sell assets for more than they paid, even if the asset is depreciating and should be sold to cut losses.
This bias causes a heightened and (in today's environment) unfounded fears of transaction costs.
Familiarity with long- held or inherited investments belonging to a trusted person can cause investors to hesitate selling them.

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Additional value individuals assert assets they are given by friends and family or inherited have.
Similar to framing bias, as the context of how a person gains the asset affects their valuation of it.

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Diagnostic Testing Tools- Status Quo Bias

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Diagnostic Testing Tools- Status Quo Bias

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The test consisted of three questions, all asking if you would be willing to replace parts of your portfolio you cherish or would be willing to sell assets you are attached to for various reasons. I always went with the advisor's advice immediately, as the questions all said that the changes were necessary after both you and the advisor reviewed them. I am fairly unattached to my assets save for what they can do for my net worth. House hunting with me is a nightmare for the realtors- I do not primarily care about the neighborhood, the wallpaper, or the layout, but rather the price of the house and its projected appreciation and evidence supporting this.

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Can cause investors to be inactive if their investments line up with what analysts, experts, and others say.
Can combine with loss aversion bias to cause investors to not change their allocation of investments due to fear of both going against the prevailing plan and losing out on potential gains.
Investors may feel emotionally attached to investments that they are comfortable with due to their acceptance and promotion by other professionals and analysts. They can also be uncomfortable with transaction costs associated with selling.

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Predisposition individuals face causing them to choose whatever option is supported by the prevailing theory or opinion of today.
Similar to conservatism bias, as both involve holding on to views that may be outdated.

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Diagnostic Testing Tools- Self Control Bias

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Diagnostic Testing Tools- Self Control Bias

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A three- question quiz with questions all relating to whether a short- term gain, purchase, or loss reduction is preferred over a longer- term gain or benefit. I knew to always chose the answer that gave the best long- term option, which was choice a for all three questions. I am a bit concerned though as my real- life answer to question two is not any of the three options (my retirement savings are  set up to avoid taxes and I will not take from the accounts or assets holding them, but they are not not entirely held by the mentioned methods).

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Can cause individuals to not save or invest enough money for their future goals, like retirement.
Investors may balance their assets incorrectly due to this bias. For example, they may prioritize income producing assets so they have more money immediately.
May cause investors to be frustrated with slower gains investments with compounding interest or those that will mature in the long term generate and sell them, causing a loss.

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The inability to act in pursuit of long- term goals, especially at the cost of short- term goals.
Similar to overconfidence bias, as both demonstrate a lack of willingness to realize the repercussions of one's actions

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Diagnostic Testing Tools- Overconfidence Bias

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Diagnostic Testing Tools- Overconfidence Bias

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This section had two four question test, the first consisting of more open- ended questions than usual. The first consisted of guessing the range of various weights, distances, and difficulty analysis questions. I always picked one to infinity, as no preset limit was chosen for the minimum and maximum guess, and I guessed that the housing and credit bubble was difficult to predict- after all, it happened, and it was not a nice time. These were all correct, as I did not give narrow, overconfident answers. The second test was about assessing personal confidence to answer questions or rating your own capacity. I was medium in confidence level for all questions save one which asked how confident I was that Capetown is the capital of South Africa. Technically this is wrong because South Africa has three capitals: Cape Town, Pretoria, and one with a very Dutch- sounding name I am currently unable to spell. So I was very confident on that one, but that is because it was factually incorrect. Other than this one, I answered correctly and did not show overconfidence by saying I am comparatively superior to others.

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Causes investors to overestimate their ability to do accurate valuation, which can be a result of their lack of valuative acumen or lack of information needed to do an accurate valuation.
Can cause underdiversification due to confidence in ability to pick good investments

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Unreasonable confidence in an individual's own reasoning, judgement, and cognitive ability.
Similar to self attribution bias, as both involve an overinflated sense of self worth

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Diagnostic Testing Tools- Loss Aversion Bias

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Diagnostic Testing Tools- Loss Aversion Bias

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This section consisted of four questions in which an investment plan or chance to gain or lose a certain amount of money. The rational answer always involved some risk, but the potential reward was statistically worth it in all cases. You would have this bias if you chose the option that offered a guaranteed chance at less money than the potential chance for more money.

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Clients of wealth managers will be more focused on any losses than any gains or successes.
Can cause investors to hold on to losing investments for too long, sometimes at the cost of diversification, hoping that they can get back what they lost ("get- even- itis") and to sell too early for fear of losing profits later.

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Individuals feel a stronger impulse to avoid loss than to acquire gains.
Similar to status quo bias, as individuals affected are afraid of some change (or more accurately what some change may cause).

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Bias type

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This test consisted of two questions, the first of which asks how far back you would want to examine a mutual fund's performance before choosing it. I chose to go with the longest examination period, which shows I do not have recency bias apparently. The second question asked me to determine if there were more male or female names in a list. I was initially confused, as there were an equal amount of both. However, the question was trying to see if I would fall for the cluster of male names at the end and chose that there were more male names.

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Investors can often misappropriate funds, especially if they have clients, to make their short- term performance look better than it actually is and use this bias to seem legitimate.
Causes investors to use too small of a sample size during evaluation of an asset.
Causes investors to focus solely on recent performance and not valuation principles.
Causes investors to overinvest in certain asset classes with recent impressive performance.

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A cognitive predisposition to emphasize events that happened recently.
Can have some overlap with outcome bias, as both look at recent events or outcomes, which are more recent than the processes preceding them.

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There were two questions. Both asked if you would investigate further a high- performing mutual fund manager and then an underperforming manager before deciding whether or not to invest with them. Regardless of their performance, I chose to investigate their processes further, as the short- term metrics used to measure their performance may miss the bigger picture of their potentially effective or ineffective methods.

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People will be more willing to deal with options that have favorable outcomes (ie there is a 70 percent chance of winning money versus a 30 percent chance of losing money). I almost used the study mentioned for this week's assignment but decided 1988 is too old for a source's publishing date
Investors may be partial to certain investments or asset classes that have historically done well without having a singular underlying reason and ignoring the processes used by that investment's management/ managers.

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When a decision is made based on the past effects of that decision, and ignores the decision making processes used to make that decision.
Similar to framing bias, as only looking for good outcomes is putting the frame on outcomes and neglecting processes. And a poor process can lead to poor outcomes.

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Diagnostic Testing Tools- Self- Attribution Bias

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Diagnostic Testing Tools- Self- Attribution Bias

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There were four questions, each discussing investments that did well or poorly. The answers to the questions ranged from the good or bad outcome being a direct cause of your skill, a mix of luck and ability, or purely luck. I answered a mix of luck and skill for all questions, which was the correct interpretation. However, answers completely discounting skill were also considered correct, which surprised me. If that were true and everything were just luck, why would there be valuation concepts and technical trading concepts to learn?

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Periods of good market performance are often mistaken by investors as sign they are particularly smart. This is not usually the case.
Investors should not blame their losses on bad luck, but should instead re- examine their research and valuation practices.

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Tendency for individuals to ascribe success to innate attributes, such as talent, and failures to outside forces, such as ill fortune.
Similar to anchoring bias, as the belief in one's innate talents is like the anchor by which they judge themselves.

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Diagnostic Testing Tools- Availability Bias

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Diagnostic Testing Tools- Availability Bias

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The first two discussed situations where a stock was recommended by a friend but you found a better investment. If you answered you would have taken the friend's advice, you would have availability bias. The third question was about whether lightning or tornadoes claim more lives in the US. I happen to know the answer to this, lightning, so this question did not work on me but I got the meaning that events portrayed as "disasters" may seem more deadly.

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Advertising and promotion can make some investment opportunities, mutual funds, etc. more widely disseminated and well known, causing them to be overrepresented.
Investors may have predetermined lists of types of investments or places to invest they will not stray from
They may also only be willing to work with similar types asset they have dealt with before.
Investors may be unwilling to learn about or understand forms of investments. I was like this about real estate.

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Causes people to tie the probability of an outcome based on prevalence or familiarity.
Similar to framing bias, as the availability of information is kind of like how it is framed in framing bias.

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This section included two mini tests that asked questions about which investment or potential retirement plan option out of two you would choose. Like the Mental Accounting diagnostic testing tool, this tool measured correctness by whether or not your answers were consistent. Each question's answer offered a risk free amount and then a fifty percent chance for some amount less than the risk free amount and a fifty percent chance for the same amount more. The primary difference between the questions were the magnitude of the risk involved. I chose consistently across both tests.

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If the same situation (ie 30 percent chance of loss and 70 percent chance of gain) is presented positively and then negatively, people will chose the positively represented option.
Questions investors have for each other can be interpreted incorrectly depending on their opinions of each other, causing differing forecasts.
Narrow framing is when investors focus too much on short- term fluctuations.
investors who have recently taken losses are more likely to take riskier investments because they have already felt the sting of a loss and are temporarily desensitized.

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Bias causing people to respond to the same situation in different contexts differently.
A good example of buying in bulk to save money was used. I often fall for that.
Similar to anchoring and adjustment bias, as the framing is like an anchor for a situation.

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Diagnostic Testing Tools- Anchoring and Adjustment Bias

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Diagnostic Testing Tools- Anchoring and Adjustment Bias

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This diagnostic test was a scenario in which your (hypothetical) house must be sold at a time when the local housing market is not doing well. You must lower the price by five, ten, or $100,000 or not at all. I chose answer c which is ten percent, just high enough of a price to be reasonable according to the question. You may have anchoring bias if you answered five percent or not at all for the price lowering, as you were fixated on the original price.

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Historic prices and index fund averages can affect market forecasts because they act as anchors.
Analysts tend to stick to their original valuations even if new information is giver (the valuations will be similar, not completely the same, but still too close to the original)
The temporary state of the market or economy can cause investors to be anchored to it for longer than the temporary boom or bust lasts.

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An imaginary "anchor" people set that is the default acceptable value or rate of return for a specific type of asset or investment.
In the research examples, if someone is given an initial value on a question that they are told is not the answer (ie the population of Canada is not 20 million, what is it?), they will use that value as the basis for any answer they give (answers given were around 20 million).
Similar to mental accounting bias, as an "anchor" is kind of like one of the categories funds are put into.

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Diagnostic Testing Tools- Mental Accounting

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Diagnostic Testing Tools- Mental Accounting

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The questions all asked questions relating to the purchase of one item and then something happens, either a similar item is offered for a lower price, the item is lost and another has to be bought, or extra money is discovered, but so is a better item for a slightly higher price. What was interesting is how this was evaluated: the six questions were split into three sets of two, and an inconsistent set of answers between how the money should be spent indicates some bias. I answered with the optimal consistency, but did not opt to buy the more expensive lawnmower in the last set (I had set aside 2000 dollars for a mower: I do not need a more expensive one, and finding more money does not change the value of that).

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People are more willing to spend using credit cards, loans, deferred payment than cash or assets.
Investors can value investments that provide capital appreciation over those that actually increase in value, as they give some money in the short term to live off of, meaning that less money needs to be taken out of savings to spend which corresponds with this bias.
Can cause investors to cling to devalued assets as they are unwilling to accept the smaller sum for them.

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Describes peoples' tendency to evaluate their assets by putting them in non- fungible mental accounts. Generally, people split up their money into three categories: current income, current assets, and future income. They are more likely to spend from accounts in this order.
Similar to framing bias, as it sets a context for how people save and invest.

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Again, I keep getting these questions right. I do not consider myself as bias free as my answers would seem to indicate. Perhaps there is some wording in the questions that tips me off to the right answer, or the fact that all the right answers are usually the same letter. I overanalyze everything, so hindsight bias is not a problem.

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I understand well that I only have so much control over my investments, no matter what I do. Therefore this section was easy for me.

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I answered the first question correctly. I answered the second question incorrectly, but this is because the question was framed so that there was only one of two choices, which is kind of a trick question.

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I answered all questions correctly. If anything, my problem is that I research too much which can cause "analysis paralysis." I know that is not a bias, but the research present in all questions reminded me of this.

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I answered c. to all three questions, the correct answer to all of them. I do sometimes find myself in the scenario in question two where I will hold onto an investment despite negative news. However, this is due to me weighing it with other positive indicators.

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I would have answered b. on the tool. I am glad I do not appear to have this bias

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Bias type

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Investors can "re- write" their own memories to make any development seem predictable.
Causes clients to blame money managers for their performance, and to believe they would have done better despite their own lack of knowledge.
Clients may also praise their money managers when their investments do well despite the manager not being responsible for this.

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People can perceive an event that has already happened was predictable, and tend to falsely remember their predictions as more accurate than they actually were.
Similar to Illusion of Control Bias in that affected see past events they had no control over as under their control.

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Makes investors believe they are smarter than they actually are, or are more confident than they should be.
Can cause underdiversified portfolios due to investors believing they know more about the investments they are making than they actually do.
Investors may use automated limiting orders due to a belief that an investments in general will not increase over a certain amount, missing out on any extra gains.

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Tendency of people to believe they can control events that are out of their control.
Similar to Hindsight Bias, as both involve the illusion that some uncontrollable event can be controlled.

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Investors make poor decision's on the performance of an analyst or money manager due to the small sample size they take of the analyst or manager's performance.
Recent performance in a few companies in an industry may make investors view the whole industry incorrectly.
Using irrelevant characteristics to rate certain kinds of investments.

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When previously constructed classifications fail to categorize new phenomenon.
Similar to Conservatism bias, as it affects how new information is received.

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Causes investors to seek information that confirms their beliefs exclusively.
Can cause rigid belief in certain metrics used to measure performance even if they are not applicable to certain situations.
Overconcentration in the stock of companies an investor has worked for or helped start is a result of this bias.
Can result in investors over investing in one firm and hurting the diversity of their portfolio.

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Selective perception that makes people more susceptible to ideas that confirm previously held beliefs.
Similar to Conservatism Bias as it affects how new information is handled.

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Can cause investors to cling to a view, forecast, or prediction.
Slows reaction time to new information.
Synergizes with mental strain of processing new information, causing older information to be easier to comprehend.

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Occurs when people cling to views or knowledge at the expense of obtaining new information.
Also causes people to not react in a drastic enough manner to new information.
Previous forecasts of future performance may be favored over actual data about real- time performance the previous forecast was trying to predict.

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Occurs when new information conflicts older, previously agreed upon information.
This causes psychological discomfort, which in turn causes the new information to be ignored or rejected.
Coping mechanisms include modifying the mistake or belief caused by this bias or manipulating perception regarding biased decision to make it seem like there was no bias.
All of the other biases deal with the discomfort of accepting new information or ideas and dealing with the difference between them and previously held beliefs. Because of this, Cognitive Dissonance Bias could be connected to any of the biases. It is almost like each bias is a more pointed and specific version of Cognitive Dissonance Bias.

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When people ignore the long- term consequences of activities that are pleasurable in the short term but damaging in the long term (like smoking, taking out loans for consumer spending).
Investors may hold on to bad investments or buy more of them because they are ashamed to admit their mistake or do not believe they could have made a mistake.
Can cause "herd behavior" (when people agree with an idea simply because many other people also agree with the idea)
Investors may incorrectly believe previous decisions were better than they actually were because they made them.

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Bias Type

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Bias subtype

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Behavioral Finance