An investor bought a stock at $80 per share. It has since fallen to $50. Despite the company's fundamentals deteriorating with no sign of recovery, the investor refuses to sell, saying 'I'll sell when it gets back to what I paid.' Which behavioral bias does this most clearly illustrate?
AHerding — the investor is following what other shareholders are doing by holding the stock
BConfirmation bias — the investor is only seeking information that confirms the stock will recover, while ignoring evidence of continued decline
CAnchoring bias — the investor is fixated on the purchase price as a reference point, treating it as the stock's 'true' value even though that price is irrelevant to the stock's current prospects and future trajectory
DOverconfidence bias — the investor believes they can time the market perfectly and sell at the exact moment the price recovers
A retail investor looks at their brokerage account and notices that three of their holdings are up significantly while two are down. They sell the three winners to 'lock in gains' but hold the two losers, hoping they recover. This pattern of selling winners too early and holding losers too long is known as what?
AMean reversion trading — a rational strategy based on the statistical tendency of asset prices to return to their long-run average
BThe disposition effect — the tendency for investors to sell assets that have increased in value while keeping assets that have declined in value, driven by loss aversion and the desire to avoid realising a loss
CMomentum investing — buying recent winners and selling recent losers to capture trending price movements
DTax-loss harvesting — strategically selling losers to offset capital gains and reduce tax liability
During a market bubble, an investor notices that nearly everyone in their social circle is buying a particular asset class, and media coverage is overwhelmingly positive. The investor decides to invest heavily despite having no independent analysis. Which cognitive bias or social influence is most directly at work?
AFraming effect — the investor's decision is influenced by the way information about the asset class is presented in the media rather than the underlying facts
BRecency bias — the investor is giving excessive weight to the most recent price performance and assuming that recent trends will continue indefinitely
CSurvivorship bias — the investor only hears success stories from people who profited and never hears about those who lost money on the same asset class
DHerding behavior — the investor is following the actions of the crowd rather than conducting independent analysis, driven by the assumption that a large group of people cannot all be wrong