Question

How overconfidence bias can cause irrational decisions?

		Prefer current income over capital appreciation thereby causing inappropriate asset allocation.
		Mistakenly expect too much returns and underestimate the risk of an investment.
		Avoid taking decisions due to the fear that the outcome of decisions might be unfavorable.
		Holding losers and selling winners in the portfolio for longer than justified resulting in holding a riskier portfolio than the optimal portfolio.

Investors biases which are impulsive in nature are generally:

		Cognitive bias
		Disposition bias
		Overconfidence
		Emotional bias

Which of the following is an important characteristic of a normal investor?

		does not treat current income and capital appreciation differently.
		separates his/her role as an investor from a consumer.
		displays cognitive and emotional bias.
		is always ignorant.

How investors conservatism bias can cause irrational decisions?

		Investors take excessive risk since they give undue credit to themselves for past success.
		Investors ignore/underestimate new information and take decisions based on purchase price, high price, low price, etc.
		Investors fail to incorporate new information by continuing to hold their prior beliefs.
		Investors separate their investments based on different goals and fail to diversify.

Which of the following represents the emotional benefit of an investment for a normal investor?

		investing in a mutual fund with the sole purpose of positive return.
		investing in alternative investments (available only to sophisticated investors) to display prestige.
		all of the above.
		investing in socially responsible mutual funds or stocks to feel righteous.

How investors self attribution bias can cause irrational decisions?

		Investors take excessive risk since they give undue credit to themselves for past success.
		Investors fail to incorporate new information by continuing to hold their prior beliefs.
		Investors ignore/underestimate new information and take decisions based on purchase price, high price, low price, etc.
		Investors separate their investments based on different goals and fail to diversify.

Answer 1

1) Overconfidence bias occurs when the subjective confidence in one's judgments is relatively higher than the actual objective accuracy. From the above examples, when one mistakenly expects too much returns by underestimating the risk of an investment, he/she is held by an Overconfidence bias.

2) Emotional biases are typically impulsive in nature as it is due to emotional factors that believes some things have positive emotional effect that gives a pleasant feeling

3) A normal investor generally displays behavioral biases like cognitive and emotional bias when choosing an investment as these come naturally to any human.

4) When an investor cannot revise his belief sufficiently even on presenting new evidence due to his excessive risk averse mentality, he is said to have a conservatism bias. So the answer is c) investors fail to incorporate new information by holding onto their prior beliefs.

5) All of the above come under emotional benefit for an investor as whether feeling righteous , displaying prestige or positive return expectation all evoke positive feelings.

6) Investors taking excess risk since they are giving undue credit to themselves is an example of self attribution bias as these investors are self serving and attributing it entirely to their skills rather than other externalities.