Question

Investors are subject to fear, for example that others know more or have more information. As a

consequence, investors feel a strong impulse to do what others are doing. Which of the following descriptions of investment behaviour are NOT examples or descriptions of
cognitive or information processing bias?
a) I carefully analyse stock or bond prices and identify mis-aligned prices (arbitrage opportunities)
b) I place too much worth on judgments derived from small samples of data or single sources. c) "Professional investors are more skilled in picking winning stock".

Answer 1

Confirmation bias and availability heuristic are examples of cognitive or information processing bias in investment behavior.

Step-by-step explanation:

An example of cognitive or information processing bias is confirmation bias, which is the tendency to search for and interpret information that confirms one's prior beliefs. In the context of investment behavior, this bias can lead investors to ignore or dismiss information that challenges their beliefs.

Option b) "I place too much worth on judgments derived from small samples of data or single sources" is an example of availability heuristic, which is the tendency to evaluate new information based on the most recent or easily recalled examples. This bias can lead investors to make decisions based on limited or biased information.

Option c) "Professional investors are more skilled in picking winning stock" is not an example of cognitive or information processing bias. Professional investors may have more experience or knowledge, but it is not necessarily a biased belief.