question archive Diva Saxona is an investment advisor in the U
Diva Saxona is an investment advisor in the U
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Diva Saxona is an investment advisor in the U.S. She has two new clients: Harry Markowitz and Sai Lee.
Harry Markowitz is a 35 year-old business man. He and his wife had recently purchased a home where they live with their young kid. The home has a mortgage of USD 420,000. Harry has been saving for several years but is behind schedule to fund his retirement. He often invests in firms in which his successful friends are investing because "they know what works." His remaining investment ideas come from advertisements by trade groups and blogs sponsored by the companies he is researching. He had repeatedly declined Saxona's suggestion to consider other additional sources of information.To justify his stance he claims to have avoided stocks that were part of "obvious bubbles" in recent years. Based on previous conversations, Saxona notes that Harry had never considered investing in such stocks.
A) Identify two behavioral biases exhibited by Harry Markowitz. Justify each bias with one example from the information provided.
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Two types of behavioural bias which is being reflected by Harry Markowitz-
A. Recency bias- The investor is trying to follow the past analysis in order to predict the future rate of return and future events because he is trying to understand that the similar past event will be leading into similar future outcomes so he is basing his expectation that those stocks which were having trouble are to be avoided because they led to declining rate of return,so it is reflection of a recency bias.
B. Bandwagon effect- Bandwagon effect is being reflected by the Investor because this effect is more primarily common with the herd behaviour as they are trying to follow up with what others are doing is the right behaviour, so he is also investing in the shares which is preferred by his friends and it is a reflection of herd mentality which is also known as bandwagon effect.
