Anchoring

After three strong years for technology shares, Ottoline Quist tells her adviser she wants 80% of her portfolio in that one sector because it is "clearly what works now." Two years earlier, following a market slump, she had insisted on holding nothing but cash. The bias driving BOTH requests is best described as:

1. A.Mental accounting, the treating of money differently depending on which mental pot it occupiesShe is not segregating funds by purpose; she is extrapolating recent performance.
2. B.Confirmation bias, the seeking out of only that evidence which supports a conclusion already heldHer conclusion reverses when the data reverse, which is the opposite of clinging to a prior belief.
3. C.Recency bias, the over-weighting of the latest results and their projection into the futureCorrect. Her conviction tracks whatever the market has just done.
4. D.Anchoring, the fixing of judgment on an irrelevant reference number such as an original purchase priceNo specific number is anchoring her judgment; it is the direction of recent returns.

Why: Recency bias is the tendency to give the most recent results disproportionate weight and to extrapolate them into the future. It explains both requests: after a slump the recent past looked dangerous, so she wanted only cash, and after a rally the recent past looks safe, so she wants concentration. The practical consequence is buying high and selling low, which is why a written policy allocation and disciplined rebalancing are the standard antidotes.

Client Barnaby Ollivant tells his IAR that his account is up over the past two years, that he places roughly forty trades a month, and that his gains prove he has a feel for the market. The two positions that went badly, he says, were the result of bad luck and a rigged market. The behavioral pattern MOST clearly displayed is:

1. A.Loss aversion, because he experiences the pain of losses more intensely than the pleasure of equivalent gains.Incorrect. Loss aversion would show up as reluctance to realize losses or excessive caution, not as high-volume trading justified by a claimed feel for the market.
2. B.Overconfidence reinforced by self-attribution, crediting gains to skill and losses to outside forces, which typically drives excessive trading and higher costs.Correct. The asymmetric explanation of outcomes is the signature of overconfidence with self-attribution, and heavy turnover is its usual and costly symptom.
3. C.Regret aversion, because he avoids taking decisions he might later have cause to regret.Incorrect. Regret aversion produces inaction and default-hugging. This client is acting constantly and expressing no hesitation at all.
4. D.Anchoring, because he fixes on the price he originally paid for each position.Incorrect. Nothing in his reasoning references purchase prices; anchoring would appear as refusing to sell until a position returns to a remembered price.

Why: This is overconfidence, reinforced by self-attribution bias: the investor credits favorable outcomes to personal skill and unfavorable ones to external forces. The combination is self-reinforcing, because it prevents the losses from ever updating his estimate of his own ability. Its practical cost is exactly what the forty-trades-a-month figure signals: excessive turnover, higher transaction costs and taxes, and concentrated bets. The adviser response is to reframe results against an appropriate benchmark on an after-cost, risk-adjusted basis rather than to argue about individual trades.

Client Basil Oyelowo insists that Farrier Optics is really worth $82 because that was its price on the day he first researched it three years ago, even though the company has since lost its two largest customers. He also reads only the bullish analyst notes his adviser forwards and dismisses the bearish ones as poorly researched. The two behavioral biases most clearly on display are:

1. A.Herding and regret aversion.Incorrect. Herding means following the crowd, and he is doing the opposite by ignoring negative consensus research.
2. B.Anchoring and confirmation bias.Correct. Fixing on the original $82 price is anchoring, and filtering research to keep only supportive views is confirmation bias.
3. C.Overconfidence and mental accounting.Incorrect. Nothing suggests he overrates his own skill, and mental accounting means treating separate pots of money by different rules.
4. D.Availability bias and hindsight bias.Incorrect. Availability bias relies on vivid recent memories, and hindsight bias is believing past events were predictable. Neither is described.

Why: Anchoring is the tendency to fix on an initial reference number, here the $82 price he first saw, and to judge all later information against it rather than against current fundamentals. Confirmation bias is the tendency to seek out and credit information that supports a conclusion already held while discounting information that contradicts it, which is exactly what he does with the analyst notes. Recognizing these patterns lets an adviser reframe the discussion around current facts rather than argue with the client conclusion directly.