Question

Your best friend Alex came to your house party for the football game. During the game he starts telling you about his amazing portfolio performance. He tells you about several posistions that experienced double digit returns in a matter of days. He says that he lost on a few but not very much. Impressed you decide to invest some money with him. What behavioral finance bias does your friend Alex portray?

A. Overconfidence
B. Anchoring
C. Cognitive Dissonance
D. Belief Perserverance

Answer 1

The correct answer is option A. Alex's behavior illustrates the Overconfidence bias, a tendency found in behavioral finance where an individual overestimates their investment decision-making abilities.

Step-by-step explanation:

The behavioral finance bias that Alex portrays is Overconfidence. Overconfidence is a bias wherein investors believe they have better information or skills than they actually do, leading them to overestimate their own abilities to predict market movements or the performance of particular stocks.

Alex's claim of achieving double-digit returns in a matter of days and his belief that he only lost a small amount on some investments may indicate that he overestimates his investment skills or the quality of his information, which can be a risk if it leads to more aggressive trading strategies without proper risk assessment.