Confirmation Bias

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broadex

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As an example of confirmation bias during a rising market, investors will be more likely to:

A
Add to their positions during market pullbacks.
B
Review their investment statements more frequently.
C
Sell some holdings to reduce exposure to the rising market.
 
I would suggest (guess) B.
I considered A. However, In a rising market, I would not expect them to add to pullbacks as the pullback wouldn’t confirm their expectation.
 
that’s a really nice question, and I also go between A or B.
A could be the correct answer because confirmation bias is a by-product of cognitive dissonance. In other words, to resolve the cognitive dissonance, you engage in seeking more information that confirms with your previous view. When the market pullbacks, you try to justify your previous action by investing even more in the stock. I would go with A
B is not the best answer because confimration bias involves seeking positive information that confirms your previous view. They don’t mention anything about that they review their statements frequently.
EDITED: another interpretation for why A might be a better choice is because in confirmation bias you tend to ignore negative information because you put too much emphasis on information that confirms your previous belief. In a sense, the pullback information doesn’t register with the investor because they don’t even pay attention to it.
 
I agree A - the rising market confirms their belief; therefore, they would see no need to review their positions.
 
The only issue I have with A, is that you don’t know it’s a pull back rather than a correction until afterwards. Ex post if you must.
to my mind, It’s only confirmation bias if you buy and it resumes upward progress, if it falls after buying,we are struggling with conservatism as we didn’t appreciate new information.
Good question and one of those that even if you are told the right answer, you can perhaps see round it, a little like most o the ethics questions at Level 3!
 
Confirmation bias is seeking out evidence that confirms your beliefs and ignoring evidence that contradicts them.
Suppose you make an investment based on your own research, but it doesn’t go up as much as you expected. What do you do? you will start finding any evidence that confirms your research which is why most people holidng their favorite stocks for long time or their company-stock as they are convinced for their growth prospects..
The question doesnt seem very clear in my opinion and you won’t probably be tested in this way in the exam. Unless if the investor hold that position(Long-the stock) and during rising markets he is going to add more to his position. Answer A. But again, the question seem to miss something,it’s behavioral stuff!!
 
Kaplan Q. Answer is B
Answer Explanation: During rising markets, people anxiously anticipate and open their statements so that it can confirm their optimism. As the result of the confirmation bias, investors will notice what confirms their beliefs and ignore what contradicts their beliefs.
Choice “a” is incorrect. Investors in a rising market believe that the market will continue racing upward, and add to their positions without regard to valuation.
Choice “c” is incorrect. Investors in a rising market tend to add to rather than reduce exposure to the rising market.
 
Thanks for this question - will also try to remember checking statements to confirm their optimism.
 
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