Question

1. What were the major 3 biases in the financial world you have witnessed in Covid Crisis this year. Give exact real-life financial examples and pls explain very briefly the biases. (5pts) (you can use any asset you want; Lira, stock market, interest rates..)

Answer 1

Three major biases in the financial world that have been witnessed in this year are as follows-

A. Loss aversion bias-This is the tendency of people to strongly prefer avoiding loss, than obtaining loss and in this covid-19 crisis in the market has fallen from its recent high, various people even after their risk taking ability was very low, instead they kept on holding onto their investment and they refused to sell loss making investment in hope that, they will get their money back but the shares kept on going lower lower at it can be seen in the case of Boeing company and all other airlines company because these companies had lost value close to 80% from the recent highs.

B. Recency bias- This is the bias which reflect that investors start believing that the past events will continue to repeat themselves in the future, so when the market crashed due to covid-19 crisis, they believed it is just normal correction and they made themself believe that the market will soon revert back and make new highs but the correction was very severe and it got into bear market, making people highly stuck in their position and they were making a lot of losses because of their recency bias as the investment lost a major chunk of its value.

C. Herding behaviour bias-herding is a behavioural buas of following the other peoples investment thesis rather than following own investment research. it was reflected in this covid-19 crisis when the market start to correct, and people were adding on to their long positions because they thought that all the investors are doing the same, as it was continuously repeated by the media houses and other companies executive of reassuring investors of their perfect stability, so they were adding onto the investment and they lost miserably because they were following the herd.