CFA CFA Level 3 READING 13: Concentrated Single-Asset Positions – Example 1

READING 13: Concentrated Single-Asset Positions – Example 1

  • This topic has 7 replies, 3 voices, and was last updated Jul-17 by RaviVooda.
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    • Alta12
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      Can someone please explain why anchoring and adjustment bias may affect Mrs Bailer’s decision making.

      Thanks.

    • Sophie Macon
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      @alta12 – can you provide more context to the question? Not all of us have the same reference. Either attaching an image or the entire text would help!

    • Alta12
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      Mr B, a former CEO of ABC company. Now retired and no longer on the board of directors. Therefore can freely sell his concentrated portfolio of ABC shares.

      In relation to Mrs B, the following statements are made:
      1) Mrs B remembers that she and Mr B started their married life with negative net worth and their family’s net worth grew over time as ABC stock skyrocketed in value.
      2) Mrs B also realises that for many years, the dividends paid on their ABC stake paid for a good portion of their living expenses.

      The question then ask what emotional and cognitive biases may affect Mrs B. The answer is status quo bias, naive extrapolation of returns and anchoring and adjustment bias. Why anchoring and adjustment bias?

    • Alta12
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      @sophie – does this help?

    • Sophie Macon
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      @alta12 – yes it does, thank you 🙂

      My take is the dividend. A steady historical dividend payout has ‘anchored’ expectations of what may happen in the future.

    • Alta12
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      @sophie Yes! That makes sense now. Thank you so much!

    • Sophie Macon
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      You’re welcome @Alta12 🙂 Discussions and exchanging views/explanation is what makes this forum tick 🙂

    • RaviVooda
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      @Alta12 there can also be a possibility of overconfidence bias, as he is ex CEO and he might think he has more knowledge than other investors

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