Hi
For the following questions I included the following biases/heuristics. The course has changed somewhat since 2010 so just wanted to check if I have thought correctly about the question and included relevant discussion points that would not be in the solutions:
(i)
Home country bias investors tend to invest disproportionally in stocks from their home country as they seem familiar and therefore the probability of their success is overestimated. Or people underestimate the probability of a market crash in their home country.
Confirmation bias: an investor will look for evidence that confirms their belief about a market crash or some other event. This can make them more likely to get the probability of occurrence incorrect. Even though they have no sway on the outcome, they are likely to have a view and overconfidence bias will perhaps result in them believing their view is the 'right' one.
I did also include availability bias and representativeness which are in the solutions.
(ii)
Status quo bias: even if people have the discretion to improve an outcome people tend to stick with their current situation even when there are more favourable alternatives available at no extra cost.
Self serving bias: people tend to credit positive outcomes on their own capabilities whilst blaming external forces or others for negative outcomes. For example, when investors assess their returns from investments they will credit themselves for the growth, but find others to blame for the falls. So, if people have the discretion to an improve an outcome they may believe they can because of the past positive outcomes ‘they have created’.
I did also include overconfidence, this is in the solutions
(iii)
Familiarity: By continuing to buy houses the investor is favouring the option that is familiar to him rather than trying a new strategy.
Loss aversion, the investor does not want to change his strategy as by changing it he could lose out if house prices continue to rise.
Endowment effects, the investor will feel some kind of utility based on the ownership of the properties themselves and therefore will not want to change strategy to sell the houses.
(iv)
Uncertainty about the excess payable and the terms and conditions means that the couple would rather choose to stay with the current company as they are certain about the conditions that are set out. Investors are risk averse and so would rather pay more than be uncertain.
Familiarity: people favour options which are familiar over those that are new, and this is another reason the couple will have stuck with the same provider.
Thank you
Last edited: Sep 21, 2021
