Question

Financial media often invites fund managers or analysts to predict future stock returns and will only invite them back if their predictions produce positive outcomes. This type of behavior by the media could lead to which of the following bias?

1-Availability heuristic/bias

2-Gambler’s fallacy

3-Hot hand fallacy

You purchased 200 shares of GPRO when it went IPO. The stock doubled in price within 3 months. You sold 100 shares, thus recovered your cost, and decided to keep the other 100 shares. The stock price has declined by more than 90% since. You told yourself it is no big deal since you didn’t lose money. This is an example of:

1-House money effect

2-Availability heuristic/bias

3-Overconfidence

Answer 1

The type of behaviour by the media could lead to Availability heuristic/bias.

In this Example,

Supoose, share price of 1 share is $ 100.

If I purchased 200 shares than the value for pirchase of shares are: $ 20,000

This price get doubled within 3 months so the value of my investment will be: $ 40,000.

By selling of 100 shares the sales value: $ 20,000 and my cost will be recovered.

Now, the remain 100 shares value are: $ 20,000 & it will be declined by more than 90%.

So, the ultimate profit i will receive is $ 18,000 (keeping in mind decline ratio is upto 90%)

This is an example of: House Money Effect.

House Money Effect:

In this Conccept,  the tendency of investors and traders to take on greater risk when reinvesting profit earned via stocks, bonds, futures or options than they would when investing their savings or a portion of their wages.

This also refers to a cognitive bias that causes investors to take greater risks with profits that they have already earned from their investments than they would with their initial capital. This happens due to the fact that investors tend to mentally segregate between the capital that they first invested and the profits that they have subsequently earned from it. They treat the profits as a lesser form of capital and thus tend to take greater risks with it.