Illusion Of Control

A client inherited shares in a single company from her grandmother and tells her adviser that she would never buy them at the current price, but she will not sell them either. This best illustrates

1. A.the disposition effect.Wrong. That describes selling winners and holding losers, and nothing here turns on gain or loss.
2. B.familiarity bias.Wrong. She is not favouring a category she knows; she is attached to this particular holding because it is hers.
3. C.the illusion of control.Wrong. She claims no ability to influence how the shares perform.
4. D.the endowment effect.Correct. The stated gap between what she would sell for and what she would pay is the signature of the bias.

Why: The endowment effect is the tendency to value something more highly simply because one owns it, which shows up as a gap between the price at which a holder would sell and the price at which the same person would buy. The client has stated that gap explicitly, which is what identifies the bias, and the emotional provenance of the shares deepens it. The practical harm is a concentrated position that survives only because selling feels like a loss of something more than money. The test an adviser uses is exactly the one she has already failed, asking whether she would buy the position today at its current price.

After picking four stocks that all rose, a client tells his adviser that he has found a method and wants to concentrate the portfolio on his next selection. The adviser should identify the flaw as

1. A.loss aversion, which is causing him to avoid diversifying the portfolio properly.Wrong. He is pursuing gains, and nothing in his reasoning involves avoiding or deferring a loss.
2. B.an illusion of control built on a run of outcomes a random process would also produce.Correct. It names the specific inference error, that four results have been read as evidence of a method.
3. C.anchoring on the purchase prices of the four holdings that performed well.Wrong. No reference price is doing any work; his argument is about his own selection ability.
4. D.framing, since the results were shown to him in percentage rather than dollar terms.Wrong. Nothing in the facts turns on how the results happened to be presented to him.

Why: Four favourable outcomes is a sample far too small to distinguish skill from chance, and a purely random process would produce that run often enough that it carries almost no information. The illusion of control is the tendency to read such a sequence as evidence of a repeatable ability, and it is dangerous here because the client proposes to act on it by removing his diversification. The adviser should show what a run of four proves and does not prove, and separate the question of whether he enjoys picking stocks from the question of how much of the portfolio should ride on it. A record long enough to be informative would have to include periods in which the method failed.