FME 01 Midterms

overlook that information that

contradicts their beliefs.
- only noticing information that
 Belief Perseverance Bias agrees with old beliefs or
- occurs when a person has clear evidence perceptions.
against, they still hold on to their previous
 Illusion of Control
belief.
- people think they can influence the
- Many people in the skeptic community are
outcome when they cannot. This
often frustrated when, after they have laid
thought can be persuasive enough
out so many sound arguments based on
to make decisions.
clear reasoning, they still can’t seem to
 Representativeness bias
change what someone believes.
- the tendency to stick to one’s belief in the - people use past experience or

face of evidence that contradicts them. information to classify new

- This comes when people show information. It is judging the past

unwavering faith in certain beliefs and information as the standard for new

refuse to change when proved wrong.  information.

 Belief Bias  Hindsight bias - seeing actions

as predictable occurrences without a
- the tendency to judge the strength of an
shred of substantial evidence
argument based on the plausibility of their
backing it.
conclusion rather than how strongly they
support the conclusion.
– It is one of the most common cognitive
 Factors that can influence
biases. This means that we are more likely
to accept the outcome of something if it belief bias
matches our core values. 1. Time - If the time available is small,
 Errors in Belief Perseverance there is a higher probability of belief
 Conservatism bias biased conclusions. And if the time
- occurs when people fail to integrate available is much, there is time for
new knowledge and end up retaining logical reasoning.
their old beliefs. 2. Nature of argument - will attract
- placing more emphasis on old an emotional conclusion from the
information used to form beliefs people.
rather than on new information 3. Available resources and
 Confirmation bias
instructions - the effects of belief
- people look for information that bias can be reduced when elaborate
confirms their beliefs. They tend to information and resources are available.
 Factors that can influence  Managing Common
belief perseverance Financial Risks
1. Readiness to change - The  Cognitive errors
willingness to change can bring 1. Belief Perseverance
about belief perseverance. When
- people tend to stick to the
people are not ready to change, they
status quo. They simply don’t
will stick to their beliefs.
process new information. It’s
2. Religious or ethnic hard for them to change from
stronghold - blindfold people their earlier stated position. 
from seeing the light even when their
beliefs have been proven wrong. 2. Information
They tend to accept assumptions
Processing bias
based on their religious or ethnic
standards.  - occur when people process

3. Fear of being left out - Once information irrational or

a member of a group sees the light,
the fear of being tagged a betrayal
keeps them a prisoner of their belief.
 Types of Belief
illogically.
 Information Processing Bias
- Information processing bias means the
inability to understand the information in
its correct sense and conceiving it

Perseverance irrationally and abruptly.

- Information processing bias also agrees
1. Self-impression - This is the belief
with confirmation bias
about one’s self.  It is a way a
- 2 ways of making sound decision
person sees themselves.
 Gather all related information
2. Social impression -  It is the belief
 Heuristics
about other people.
3. Social theory - is the belief about - Heuristics by Socialist Herbert Simon

how the world works.  Anchoring and

adjustment bias – the
investor “anchors” or fixes
themselves with the first
information they receive and
then adjust any new information
that they received with regards
to this fixed point.
  Mental accounting bias  Emotional biases are harder to correct for

– depends upon the provided because they are based on feelings, which

money divided for different uses can be difficult to change.

intended for it already.  To adapt to a bias is to recognize and

accept the bias and to adjust for the bias
 Framing bias – depends
rather than to attempt to moderate the bias.
upon the interest of the investor
 To moderate a bias is to recognize the bias
purchasing the object is
and to attempt to reduce or even eliminate
proportional the way he is
the bias within the individual.
approached.
 Cognitive errors can be further classified
 Availability bias – people
into two categories: belief perseverance
tend to favor their decisions that
biases and information-processing biases.
are easily accessible or
 Belief perseverance errors reflect an
approachable.
inclination to maintain beliefs. The belief is
maintained by committing statistical,
 True or false possibility information-processing, or memory errors.

Questions Belief perseverance biases are closely

related to the psychological concept of
 Individuals do not necessarily act rationally
and consider all available information in the
decision-making process because they may
be influenced by behavioral biases.
 Biases may lead to suboptimal decisions.
 Behavioral biases may be categorized as
either cognitive errors or emotional biases. cognitive dissonance.
A single bias may have aspects of both,
however, with one type of bias dominating.
 Cognitive errors stem from basic statistical,
information-processing, or memory errors;  Belief perseverance biases include
cognitive errors typically result from faulty conservatism, confirmation,
reasoning. representativeness, illusion of control, and
Emotional biases stem from impulse or hindsight.
intuition and tend to result from reasoning  Information-processing biases result in
influenced by feelings. information being processed and used
 Cognitive errors are more easily corrected illogically or irrationally.
for because they stem from faulty reasoning  Information-processing biases include
rather than an emotional predisposition. anchoring and adjustment, mental
accounting, framing, and availability.
 Emotional biases include loss aversion, money, you hold on in hopes that
overconfidence, self-control, status quo, you will, one day, make it back to
endowment, and regret aversion. even. 
 Understanding and detecting biases is the  Overconfidence bias -
first step in overcoming the effect of biases believes that their skill as an investor
on financial decisions. By understanding is better than others' skills.
behavioral biases, financial market
 Endowment bias - Similar to
participants may be able to moderate or
loss-aversion bias, this is the idea
adapt to the biases and, as a result,
that what we do own is more
improve upon economic outcomes.
valuable than what we do not
 Behavioral finance has the potential to
explain some apparent deviations from
market efficiency (market anomalies).
 Emotional Factors of
 Emotional bias - typically occur Emotional bias
spontaneously based on the  To attribute negative judgements to
personal feelings of an individual at neutral events or objects
the time a decision is made. They  To believe something that has a positive
may also be deeply rooted in emotional effect that gives a pleasant
personal experiences that also feeling even if there is evidence to the
influence decision-making. contrary
 Status Quo bias -: Humans  to be reluctant to accept hard facts that
are creatures of habit. Resistance to are unpleasant and give mental
change spills over to investment suffering.
portfolios through the act of
repeatedly coming back to the same
 Effect of dispositional
stocks and ETFs instead of
researching new ideas emotionality
 Risk-averse bias - often  Temperament traits - refers
causes investors to put more weight to consistent individual differences in
on bad news than good news. behavior that are biologically based

 Bandwagon-effect - Warren and are relatively independent of

Buffett became one of the most learning, system of values and

successful investors in the world by attitudes.

resisting the bandwagon effect.

 Loss-aversion bias - you  Influence of emotional bias
don’t want to admit that the loss has  Sleep - Emotional attention bias
gone from a computer screen to real can be influenced by sleep. This
occurs because sleep prepares the
body for emotional challenges.