Question

In: Finance

Which of the following is the closest explanation of the phenomenon that most investors use past...

Which of the following is the closest explanation of the phenomenon that most investors use past price information to pick stocks or mutual fund?

A.

Misattribution bias
B.

Choice overhead
C.

Cognitive dissonance
D.

Representativeness bias

Solutions

Expert Solution

Answer is (D) Representativeness Bias

Misattribution bias basically deals with how the mood of an investor can drive his decisions at the market. For example, if he is sad or distressed, he may sell his investment holdings, if he is happy, he may go and buy in some investments.

Cognitive dissonance occurs when a newly acquired information conflicts with the pre-existing one. For example, investor thoight Apple was a great stock to invest in given the far superiod technology it uses, however the new iphone it released was much inferior technologically to the phone released by Samsung.

Representativeness Bias mentions using overly simple decision making for investments. This also refers to the fallacy that past information is considered as representive of the new information. For example, if you go an invest in a company just because it has been performing well for past 5 years, without proper research on its future market prospects (remember Nokia?).

jeff jeffy answered 2 years ago
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