CFA3: Behavior Finance Study Session 8
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Compare and contrast cognitive errors and emotional biases
Cognitive errors are the result of mechanical or physical limitations. Such as lack of information or processing capacity.
Emotional biases are caused by psychological predispositions that affect how people see information and make decisions.
What are the two subcategories of cognitive errors?
- Believe perseverance
- Information processing
What is believe perseverance
Arise our of an individuals attempts to avoid cognitive dissonance. The biases can be divided into conservativsm, confirmation, control, hindsight and representativeness
What is conservatism bias?
individuals unconciously place more emphases on info they used to form their original forecase than on new information.
What is confirmation bias?
Individuals tend to notice only information that agrees with their perceptions or believes. They discount or ignore contradictory info.
What is contorl bias?
Also known as illusion of control, individuals feel tehy have more control over outcome than they really do.
What is hindsight bias?
Individuals percieve actual outcomes are reasonable and think they know why something happened. It's difficult to argue since that is what happened, but it doesn't make their reasoning of why accurate.
What is representativeness bias?
individuals classify information into subjective categories using heruistics; they place new information into the most appropriate category based on their personal experiences. They feel that their past experiences are representative of all the info they need to classify new information.
What would you like to do?
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