Question

Griffin believes he is a sophisticated investor and has the ability to select the best funds and outperform market indices. He invests solely with New England Mutual Funds, a very large and well-known family of funds covering the international market. At one point, Griffin was approached by an asset manager from Pawtucket Investments, a much smaller firm by AUM compared to New England and focuses only on select market segments. The asset manager tried unsuccessfully, to persuade Griffin to switch to Pawtucket. When asked why, Griffin responded that New England is familiar and convenient.

C. Discuss two potential behavioral biases Griffin exhibits and justify your response.

Answer 1

To understand the above case a popular quote by Benjamin Graham is "The investor’s chief problem—and even his worst enemy—is likely to be himself."

we will further discuss the two potential behavioral biases that Griffin exhibits in a justified manner:

we know that behavioral finance is a new field of study where we combine psychological theory with conventional economics, but we can say that regardless of how disciplined, we often trade with behavioral biases that can cause us to act on emotion. before we discuss the two potential behavioral biases that Griffin exhibits we must understand different types of behavioral biases,

1) Overconfidence, 2) Reducing Regret, 3) Limited Attention Span, 4) Chasing Trends, 5) Fear of Loss, etc.

Now let us discuss what are the potential behavioral biases that Griffin exhibits:

1) Overconfidence: Griffin believes he is a sophisticated investor and has the ability to select the best funds and outperform market indices. the given statement is enough to say that he has these behavioral biases. Griffin must learn more about investments to increase his profits but it seems like he is overconfident about his decisions.

let's discuss how to avoid this bias
Trade less and invest more. Understand that by entering into trading activities and by increasing your time frame, mirroring indexes, and taking advantage of dividends, you will likely build wealth over time. Resist the urge to believe that your information and intuition is better than others in the market.

2) Fear of loss: behavioral finance pioneers Dan Kahneman and Amos Tversky found that investors are more sensitive to lose than to risk and possible return. In short, people prefer to avoid loss over acquiring an equivalent gain, Griffin was totally dependent on New England Mutual Funds. he chose it only because it was familiar and convenient. but there many factors that must be considered before any investments.

with the help of the given case, we can assume that the above are two potential behavioral biases that Griffin exhibits.