Behavioural finance - biases questions

Discussion in 'SA7' started by Canuck_Act, Apr 30, 2019.

  1. Canuck_Act

    Canuck_Act Member

    Hello all!

    I have some question re the info in the SA 7 course notes, as follows:

    Q1) The "Loss aversion" bias seems to be what was called "prospect theory" bias in subject ST 5, is that a correct assumption?
    It does not appear to be "myopic loss aversion", since multi periods are not mentioned.

    Q2) From subject ST 5, we learn that both confimation bias (CB) and hindsight bias (HB) are sub-categories of the overconfidence bias. I am okay with that, and the SA 7 notes also confirm this, but the new SA 7 notes mention that overconfidence is an emotional bias whereas both CB and HB are cognitive biases. Does anyone not find it odd, given the distinction between emotional and cognitive biases?

    In a similar vein, prospect theory, could be classified as a sub-category of "Framing and question wording", since it relies on the way the value is framed (ie as either a gain or a loss relative to the reference point), but the SA 7 notes have loss aversion as an emotional bias and framing as a cognitive bias?

    Q3) If I find the ST 5 course notes easier to follow, then, provided there is no contradiction with core notes, is it acceptable to use the definitions from the st 5 notes for the SA 7 exam?

    Thank you.
     
  2. Colin McKee

    Colin McKee ActEd Tutor Staff Member

    Hi
    Can you add the chapters and sections that your question relates to? Loss aversion is mentioned in various sections and it would be useful to know which one has sparked the question. Looking at the questions, I would not say that loss aversion and prospects theory are closely linked. Prospects theory is about people having loss aversion when they have a profit to lose, and possibly being risk-seeking when they have a loss to gamble away. So it touches on loss aversion but ois not the same.
    I agree that the emotional and cognitive are very difficult to differentiate between and most themes will probably have elements of both. Hindsight bias and confirmation bias are the cognitive processes that make the emotional overconfidence worse. Perhaps that is the exaplanation.
    In the SA7 exam, any bookwork tested would expect you to give the SA7 core reading explanation rather than the SP5 core reading. I would tend to go for the SA7 definitions in the SA7 exam if they exist in the course notes.
    I hope this helps, but feel free to post additional references or comments if you have questions.
     

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