CFA III-Behavioral Finance关键点清单

CFA III Behavioral Finance关键点清单Vol 2
Session 3 Behavioral Finance
Reading 5 The Behavioral Finance Perspective
Behavioral finance与traditional finance不同点：how investors & markets behave in practice rather than in theory. 3M5
Normative analysis: rational solution to problems. 3M6 →traditional finance.
Descriptive analysis: how people actually make decisions. 3M6→behavior finance Prescriptive analysis: practical advices & tools that might help people achieve results more closely approximating those of normative analysis. 3M6
Traditional finance: 基于neoclassical economics:3M7
1.Investors are risk-averse & self-interested utility maximizers→rational
2.Market prices incorporate and reflect all available & relevant information.
Behavioral finance: 基于psychology. 3M7
1.Behavioral finance mirco: examine behaviors or biases that distinguish individual investors
from rational actors in neoclassical economic theory.
2.Behavioral finance marco: consider market anomalies that distinguish markets from efficient
markets of traditional finance.
Behavioral biases: 3M7
1.Cognitive errors: basic statistical, information-processing, or memory errors; reasoning based
on faulty thinking.
2.Emotional biases: impulse or intuition; reasoning influenced by feelings. 3M7
Traditional finance approach relies on assumption s that oversimplify reality and are challenged by behavioral finance. 3M8
2.1 Traditional Finance Perspectives on individual behavior 3M8
2.1.1 Utility theory & Bayes’ Formula: 3M8
Utility: level of relative satisfaction received from the consumption of goods & services.
Utility theory: decision makers choose between risky or uncertain prospects by comparing their expected utility values. They maximize their expected utility --- weighted sum of utility values of outcomes multiplied by their respective probabilities --- subject to their budget constraints. 3M8
Utility depends on particular circumstances & preferences of the person making estimated utility. 3M8
Four basic axioms of utility theory: 3M9
pleteness: choices A & B, 要么倾向于两者之一，is 要么indifferent
2.Transitivity: 传递性，基于completeness；an individual decides consistently. 【以下内容理
解记忆】：Given choices A, B, and C, if an individual prefers A to B and prefers B to C, then the individual prefers A to C; if an individual prefers A to B and is indifferent between B and C, then the individual prefers A to C; or, if an individual is indifferent between A and B and prefers A to C, then the individual prefers B to C.
3.Independence: 假设A and B mutually exclusive,且C 可与A或B相加。

If A is preferred to
B，那么A plus x% of C is preferred to B plus x% of C. This assumption allows for additive utilities. 下面这句理解记忆If the utility of A is dependent on how much of C is available, the utilities are not additive.
4.Continuity: three lotteries (A, B, and C) and the individual prefers A to B and B to C, then
there should be a possible combination of A and C such that the individual is indifferent between this combination and the lottery B. The end result is continuous indifference curves.
Bayes’formula: 3M9 All possible events must be mutually exclusive and exhaustive events with known probabilities. 3M10
P(A|B) = [P(B|A)/P(B)] P(A)
where:
P(A|B) = updated probability of A given new information B.
补充：P(AB) = P(A|B) x P(B)
2.1.2 Rational Economic Man 3M11
REM will try to obtain the highest possible economic well-being or utility given budget constraints and the available information about opportunities, and base choices only on his own personal utility, not considering the well-being of others except to the extent this impacts his own utility.
Indifference curve: choices made by REM will fall on that curve.3M12
2.1.3 Perfect Rationality, Self-interest, and information 3M12
2.1.4 Risk Aversion 3M13
Utility functions of Risk averse: concave凸函数& diminishing marginal utility of wealth. 3M13 Risk-averse(prefer certainty than uncertainty, given other conditions unchanged), risk-neutral & risk-seeking.
Certainty equivalen t: evaluate
attitudes toward risk. Max sum
of money one would pay to
participate or minimum sum of
money one would accept to not
participate in the opportunity
Risk premium: difference
between certainty equivalent &
expected value 3M13
2.2 Behavioral Finance
Perspectives on Individual Behavior 3M14
2.2.1 Challenges to Rational Economic Man 3M15
缺点：disregard inner conflicts that real people face. 3M15
Strong criticism: perfect information. 3M15
2.2.2 Utility Maximization & Counterpoint 3M15
Indifference curve analysis may incorporate budget lines or constraints, (which represent restrictions on consumption that stem from resource scarcity.)3M15
2.2.3 Attitudes Toward Risk 3M17
risk evaluation is reference-dependent, meaning risk
evaluation depends in part on the wealth level and
circumstances of the decision maker
Double inflection utility function(Friedman-Savage),
u(z): A utility function that changes based on levels of
wealth. 3M17
3 Decision Making 3M20
3.1 Decision Theory 3M20 →normative
Decision theory: identify values, probabilities, and
other uncertainties relevant to a given decision and
using that information to arrive at a theoretically
optimal decision. As such, it assumes that the
decision maker is fully informed, is able to make
quantitative calculations with accuracy, and is perfectly rational. 3M20
3.2 Bounded Rationality 3M22
People are not fully rational when making decisions and do not necessarily optimize but rather satisfice when arriving at their decisions. People have informational, intellectual, and computational limitations. Rely on rule of thumbs.
Satisfice: satisfy & suffice.
Optimal solution: maximizes utility realizable from the situation
Decision makers选择satisfice因为cost and time of finding the optimal solution can be very high. 3M22
A decision maker exhibits bounded rationality when he violates some commonly accepted precept of rational behavior but nevertheless acts in a manner consistent with the pursuit of an appropriate set of goals or objectives. 3M23
3.3 Prospect Theory 3M24 is an alternative to expected utility theory.
定义：how prospects (alternatives) are perceived based on their framing, how gains and losses are evaluated, and how uncertain outcomes are weighted.
Descriptive analysis: two phases
1) prospects are framed (or edited): alternatives are ranked according to a basic heuristic that was identified and chosen by the decision maker. 【分6个operations→下面framing部分会展开】2) prospects are evaluated & chosen:
以上两步具体过程: people establish a reference point (economically identical outcomes) to consider where these prospects rate. Outcomes below the reference point are viewed as losses, and those above the reference point are gains. In the second phase, the edited prospects are evaluated and the prospect of highest perceived value is chosen.
Framing：the way an option or prospect can be affected by the way in which it is
presented.(critical aspect of prospect theory) 3M24
Six editing operations permit or prevent others from being carried out. 3M25
1.Codification: Prospects are coded as (gain or loss, probability; gain or loss, probability; …) such that the initial probabilities add to 100 percent or 1.0.
bination: Prospects are simplified by combining probabilities associated with i dentical gains or losses. For example, a prospect initially coded as (250, 0.20; 200, 0.25; 200, 0.15; 150, 0.40) will be simplified to (250, 0.20; 200, 0.40; 150, 0.40).
3.Segregation: Riskless component of any prospect is separated from its risky component. 比如a prospect initially coded as (300, 0.8; 200, 0.2) 分解成a sure gain of (200, 1.0) and a risky prospect of (100, 0.8; 0, 0.20). The same process is applied for losses. 3M25
以上3点针对each prospect separately而以下3点则针对two or more prospects. 3M25
4. Cancellation: 两组probability相同部分可抵消. For example, the pairs (200, 0.2; 100, 0.5; 20, 0.3) and (200, 0.2; 300, 0.4; –50, 0.4) are reduced to (100, 0.5; 20, 0.3) and (300, 0.4; –50, 0.4). 3M25
5. Simplification: Prospects are likely to be rounded off. [A prospect of (51, 0.49) is likely to be seen as an even chance to win 50]. Also, extremely unlikely outcomes are likely to be discarded or assigned a probability of zero. 3M25
6. Detection of Dominance: Outcomes that are strictly dominated are scanned and rejected without further evaluation. 3M25
the act of editing可能产生preference anomalies,比如isolation effect. 3M25（inconsistent preferences depend on the framing of the choice）3M25-26
3.3.1 The Evaluation Phase 3M26
U = w(p
)v(x1) + w(p2)v(x2) + …
1
where x1, x2… are the potential outcomes and p1, p2…
their respective probabilities; v is a function that assigns
a value to an outcome; and w is a probability-weighting function.
Contrast between expected utility & prospect theories:考点
1）Values are attached to changes rather than final states, and the
decision weights need not coincide with probabilities
2）In contrast to expected utility theory, the prospect theory value
function measures gains and losses but not absolute wealth and is
reference-dependent（reference dependence是prospect theory核心
之一）3M27
3）Prospect theory: overweight low probability outcomes, underweight moderate and high probability outcomes, and have a value function for changes in wealth (gains and losses) that is in general concave凸for gains, convex for losses, and steeper for losses than for gains. As a result, people are risk-averse on moderate to high probability of gains or a low probability of losses; they are risk-seeking on a low probability of gains or a high probability of losses.
3M28
4.Perspectives on Market Behavior & Portfolio Construction 3M28
4.1 Traditional Perspectives on Market Behavior 3M28
4.1.1 Review of the Efficient Market Hypothesis 3M29
EM: 1) a market where prices fully reflect available information because of the actions of a large number of rational investors. 2) relevant info is freely available to all participants. 3M29 Grossman-Stiglitz Paradox: prices must offer a return to information acquisition, otherwise information will not be gathered and processed. If information is not gathered and processed, the market cannot be efficient. 3M29 （理解记忆）
Fama: weak form, semi-strong form & strong form. 3M29
4.1.3 Studies Challenging the EMH: Anomalies 3M32
4.1.3.1 Fundamental Anomalies:low P/E,P/S ratio stocks exhibit anomalous performance 34
4.1.3.2 Technical Anomalies:技术分析3M34
4.1.3.3 Calendar Anomalies：January Effect & Turn-of-the-month effect 3M35
4.2 Traditional Perspective on Portfolio Construction 3M36
A rational portfolio is mean-variance efficient., based on investors or their advisers have perfect info & investors behave rationally in forming their portfolio.
4.3 Alternative Models of Market Behavior & Portfolio Construction 3M36
4.3.1 A behavioral Approach to Consumption & Savings. 3M37
Behavioral life-cycle theory: 1) self-control (pursue long-term goals rather than short-term satisfaction) 2) Mental accounting: treat one sum of money differently from another sum of money.
3) framing: how questions are asked. 3M37
Source of wealth: 1) current income, 2) currently owned assets 3) present value of future income.
4.3.2 A Behavioral Approach to Asset Pricing 3M38
An Alternative to classic CAPM: Stochastic Discount Factor based asset pricing model, which focuses on market sentiment as a major determinant of asset pricing, in turn derived from systematic errors in judgment by investors. Sentiment causes asset prices to deviate from values determined by traditional finance approaches.
Sentiment pertains to erroneous, subjectively determined beliefs. If an investor’s subjective beliefs about the discount rate match those of traditional finance, the investor is said to have zero risk sentiment. Otherwise则i nclude risk sentiment. 3M38
4.3.3 Behavioral Portfolio Theory 3M39: probability-weighting function.
investors construct their portfolios in layers and expectations of returns and attitudes toward risk vary between the layers. The resulting portfolio may appear well-diversified, but may not from a mean–variance perspective.
portfolio construction is primarily a function of five factors.
1.allocation to different layers depends on investor goals and importance assigned to each
goal.3M39
2.allocation of funds within a layer to specific assets will depend on the goal set for the layer
3.number of assets chosen for a layer depends on the shape of the investor’s utility function.
Risk-averse individuals have concave utility functions (diminishing marginal utility of wealth).
The greater the concavity of the utility curve, the earlier the satiation for a specific security.
Thus, the greater the concavity of the utility curve, the greater the number of securities
included in a layer
4.concentrated positions in some securities may occur if investors believe they have an
informational advantage of the securities
5.investors reluctant to realize losses may hold higher amounts of cash s o that they do not have
to meet liquidity needs by selling assets that may be in a loss position
In the first layer, the investor seeks safety by buying bonds or riskless assets in order to insure his aspirational level of wealth with a small maximum chance of failure. In the second layer, the investor is willing to take risk with the residual wealth. In consequence, a BPT-optimal portfolio can differ from the rational diversified portfolio that is mean–variance efficient 3M40
3M40 Example 3要再看看。

4.3.4 Adaptive Markets Hypothesis 3M41适者生存
Similar to an ecological system, markets are influenced by competition for scarce resources and adaptability of participants. 3M41
1) risk premiums change over time
2) active management can add value by exploiting arbitrage opportunities;
3) any particular investment strategy will not consistently do well
4) the ability to adapt and innovate is critical for survival;
5) survival is essential objective.
Reading 6 The Behavioral Biases of Individuals
2.1 Differences between Cognitive Errors & Emotional Biases 3M51
Cognitive errors are more easily corrected than emotional biases. 3M51
3.Cognitive Errors 3M52
3.1 Belief Perseverance Biases 3M52
Related to cognitive dissonance不一致,即mental discomfort when new information conflicts with previously held beliefs or cognitions.
1) Selective exposure: notice only info of interest 3M52
2) Selective perception: ignore or modify info that conflicts with existing cognition.
3) Selective retention: remember or consider only info that confirms existing cognitions. 3M52 3.1.1 Conservatism Bias 3M52:
People maintain prior views by inadequately incorporating new information. (statistical & information-processing errors).3M52
Consequences of Conservatism Bias: 3M54
1)Maintain or be slow to update a view or a forecast, even when presented with new
information.
2)Opt to maintain a prior belief rather than deal with the mental stress of updating beliefs given
complex data
Detection of & Guidance for Overcoming Conservatism Bias: 3M54
1) properly analyze and weight new information.
Hirshleifer (2001) inverse correlation: the higher the cognitive cost(effort in processing info & updating beliefs), the less likely information will be processed and beliefs updated.
2)或者seek advice from a professional.3M55
3.1.2. Confirmation Bia s 3M55：People look for and notice what confirms their beliefs, and to ignore or undervalue what contradicts their beliefs.
Consequences of Confirmation Biases: 3M55
1.Consider only positive info about an existing investment and ignore any negative info about
it.
2.Develop screening criteria and ignore info that either refutes the validity of the screening
criteria or supports other screening criteria.
3.Under-diversify portfolios, leading to excessive exposure to risk.
4.Hold a disproportionate amount of their investment assets in their employing company’s
stock because they believe in their company & its favorable prospects.
Detection of & Guidance for Overcoming Confirmation Bias: 3M56
1) actively seek out info that challenges your beliefs. 2)get corroborating support for an investment decision. (conduct additional research) 3M56
3.1.3 Representativeness Bias 3M56
People classify new information based on past experiences and classifications. Lead to statistical & information-processing errors.
In Bayesian terms, FMPs underweight base rates and overweight new information.
1)Base rate neglect: 做投资决策时FMPs rely on stereotypes without adequately incorporating the base probability of the stereotype occurring
2)Sample-size Neglect: Financial Market Paricipants incorrectly assume that small sample sizes are representative of populations (or “real” data). 3M57
Consequences of Representativeness Bias: 3M58
1.Adopt a view or a forecast based almost exclusively on new information or a small sample.
2.Update beliefs using simple classifications rather than deal with the mental stress of updating
beliefs given complex data. 3M58
Detection of & Guidance for Overcoming Representative Bias: 3M58
1)FMPs need to be aware of statistical mistake s they may be making and constantly ask
themselves if they are overlook ing the reality of the investment situation.
2)考虑returns时消除representativeness bias影响，用periodic table of investment
returns.3M59
3.1.4 Illusion of Control Bias 3M61
People believe that they can control or influence outcomes when, in fact, they cannot. Consequences of Illusion of Control 3M61
1.Trade more than is prudent.
2. inadequately diversify portfolios. 3M61
Detection of & Guidance for Overcoming Illusion of Control Bias: 3M61
1.recognize control over things are little. 2 Seek contrary viewpoints. 3Keep records 3M61
3.15.Hindsight Bias 3M62
People may see past events as having been predictable and reasonable to expect. Consequences of hindsight Bias 3M62
1.Overestimate t he degree to which they predicted an investment outcome, thus giving them a
false sense of confidence.
2.Cause FMPs to unfairly assess money manager or security performance, which is compared
against what has happened as opposed to expectations.
Detection of & Guidance for Overcoming Hindsight Bias: 3M62
1)Am I re-writing history ?
2)carefully record and examine their investment decisions, both good and bad, to avoid
repeating past investment mistakes. 3M62
3)Education is critical here. It is important that all investment managers be evaluated relative to
appropriate benchmarks and peer groups. 3M63
3.2 Information-Processing Biases 3M63 （算cognitive Errors）
3.2.1 Anchoring & Adjustment Bias 3M63
估数值时,people begin by envisioning some initial default number—an “anchor”—which they then adjust up or down to reflect subsequent information and analysis. Closely related to conservatism bias. 3M63
Consequences of Anchoring & adjustment Bias 3M63
FMPs may stick too closely to their original estimates when new information is learned. Detection of & Guidance for Overcoming Anchoring & Adjustment Bias 3M63
1.最主要手段：consciously ask questions that may reveal an anchoring and adjustment bias
2.look at the basis for any security recommendations to see whether they are anchored to
previous estimates or based on an objective, rational view of changes in company fundamentals.
3.2.2 Mental Accounting Bias 3M64
people treat one sum of money differently from another equal-sized sum based on which mental account the money is assigned to.
Consequences of Mental Accounting Bias 3M64
Place investments into discrete “buckets” without regard for correlations among these assets.
1.Neglect opportunities to reduce risk by combining assets with low correlations.
2.Irrationally distinguish between returns derived from income and those derived from capital
appreciation.先拿着income花，不管capital是否能收回。

Detection of & Guidance for Overcoming Mental Accounting Bias 3M64
1.应对consequence中第一点，关注资产间correlations 3M65
2.应对consequence中第二点，关注total return.
3.2.3 Framing Bias 3M65
information processed取决于how the question is framed(asked) 3M65
narrow framing: lose sight of big picture. 3M65
Consequences of Framing Bias 3M67
1.Misidentify risk tolerances; may become more risk-averse when presented with a gain frame
of reference and more risk-seeking when presented with a loss frame of reference. 导致sub optimal portfolios.
2.Choose suboptimal investments, even with properly identified risk tolerances
3.Focus on short-term price fluctuations, which may result in excessive trading.
Detection of & Guidance for Overcoming Framing Bias 3M67
1.做决定时try to eliminate any reference to gains and losses already incurred; instead focus on
the future prospects of an investment.
2.Regarding susceptibility to the positive and negative presentation of information, investors
should try to be as neutral and open-minded as possible when interpreting investment-related situations. 3M67
3.2.4 Availability Bias 3M67
people take a heuristic approach to estimating the probability of an outcome based on how easily the outcome comes to mind.
1.Retrievability:脑海中first answer or idea will likely be chosen as correct even if it is not.
3M67
2.Categorization: Different problems require different search sets, which are often based on
familiar categorizations. If it is difficult to come up with a search set, the estimated probability of an event may be biased. 3M68
3.Narrow Range of experience: 井底之蛙，自以为是3M68
4.Resonance: how closely a situation parallels people’s own situation 3M68
Consequences of Availability Bias 3M68
1.Choose an investment etc based on advertising rather than on a thorough analysis of options
2.Limit their investment opportunity set.
3.Fail to diversify, due to narrow range of experience.
4.Fail to achieve an appropriate asset allocation. 仅取决于个人喜好而非risk & returns.3M68 Detection of & Guidance for Overcoming Availability Bias 3M69
Disciplined approach: investors need to develop an appropriate IPS, carefully research and analyze investment decisions before making them, and focus on long-term
results.不要匆匆想到什么就是什么
4. Emotional Biases 3M70
4.1 Loss-Aversion Bias 3M70
People strongly prefer avoiding losses rather than achieving gains
Disposition effect:亏损持有期holding太长，盈利持有期太短3M70
-→Value function of loss aversion 3M71---------------------------------→
Consequences of Loss Aversion: 3M72
1.Hold investment in a loss position longer than justified by fundamental analysis. 3M72
2.Sell investments in a gain position earlier than justified by fundamental analysis3M72
3.Limit the upside potential of a portfolio by selling winners and holding losers.
4.Trade excessively as a result of selling winners.
5.Hold riskier portfolios than is acceptable based on the risk/return objectives of the FMP. 72
Framing & loss-aversion biases happen simultaneously. 净亏损者倾向于选择riskier投资而净盈利者倾向于less risky ones. 3M72
Special Application: Myopic Loss Aversion: 3M72
investors evaluate their portfolios annually and overemphasize short-term gains and losses and weigh losses more heavily than gains. The overemphasis on short-term losses results in a higher than theoretically justified equity risk premium.
小结：non myopic investorsprefer长期（compound returns）risky投资。

3M73
Detection of & Guidelines for Overcoming Loss Aversion: 3M73
1) A disciplined approach to investment based on fundamental analysis:2) realistically consider the probabilities of future losses & gains. 3M73
4.2 Overconfidence Bias 3M73
people demonstrate unwarranted faith in their own intuitive reasoning, judgments, and/or cognitive abilities. 3M74 也称Illusion of Knowledge bias:3M74
Combined with self-attribution bias: people take credit for successes and assign responsibility for failures 3M74
Overconfidence有cognitive和emotional两面但归为emotional（因为其dominate）3M74 Sub-categories：3M74
1) prediction overconfidence：confidence intervals that assigned to their investment predictions are too narrow 3M74
2) certainty overconfidence: probabilities assigned to outcomes are too high因为太过自信3M74 Consequences of Overconfidence Bias: 3M75
1.Underestimate risks and overestimate returns.
2.Hold poorly diversified portfolios.
3.Trade excessively.
4.Experience lower returns than those of the market.
Detection of & Guidelines for Overcoming Overconfidence Bias: 3M75
1)review trading records, identify winners and losers, and calculate portfolio performance over
at least two years. 3M75
2)to view reasoning behind and results of investments, winning and losing, as objectively as
possible. 3M76
4.3 Self-Control Bias 3M76
people fail to act in pursuit of their long-term, overarching goals because of a lack of
self-discipline.今朝有酒今朝醉
Consequences of Self-control Bias: 3M77
1.Save insufficiently for the future.
意识到第一点后人会做：
2.Accept too much risk in their portfolios to generate higher returns.
3.Cause asset allocation imbalance problems.
Detection of & Guidelines for Overcoming Self-Control Bias 3M77
a proper investment plan is in place and have a personal budget. Adhering to a saving plan and an appropriate asset allocation strategy are critical to long-term financial success.
4.4 Status Quo Bias 3M77
people do nothing instead of making a change.
常与endowment & regret-aversion biases一起讨论，都是maintain existing positions3M77 Consequences of Status Quo Bias: 3M78
1.Unknowingly maintain portfolios with risk characteristics inappropriate for their
circumstances.
2.Fail to explore other opportunities.
Detection of & Guidelines for Overcoming Status Quo Bias 3M78
Education is essential. Quantify the risk-reducing and return-enhancing advantages of diversification and proper asset allocation.
4.5 Endowment Bias 3M78
people value an asset more when they hold rights to it.
Consequences of Endowment Bias: 3M79
1.Fail to sell off certain assets and replace them with other assets.
2.Maintain an inappropriate asset allocation.
3.Continue to hold familiar asset classes.
Detection of & Guidelines for Overcoming Endowment Bias 3M79
Inherited securities are often the cause of endowment bias, it may be useful to explore the deceased’s intent in owning and bequeathing the investment.
4.6 Regret-Aversion Bias 3M78
people avoid the pain of regret associated with bad decisions, causing FMPs to hold on positions too long. 3M79
Two dimensions:1) Error of commission: regret from an action taken 2) Error of omission: regret from an action not taken 3M79
Consequences of Regret-Aversion Bias: 3M80
1.Be too conservative in their investment choices as a result of past poor outcomes on risky
investments, leading to long-term underperformance and failure to reach investment goals.
2.Engage in herding behavior.随大流，法不责众。

3M80
Detection of & Guidelines for Overcoming Regret-Aversion t Bias 3M80 同status quo bias
5. Investment Policy & Asset Allocation 3M81
Goals-based investing: 1) identify an i nvestor’s specific goals and risk tolerance associated with each goal. 2) Investments are chosen considering each goal individually. 3) a portfolio is constructed in layers rather than using modern portfolio theory (MPT). 4) Investors are assumed to be loss averse, not risk averse. 3M81【与reading 5 behavioral portfolio theory同】
5) This approach更适应investors for wealth preservation (i.e., minimizing losses) than for wealth accumulation (i.e., maximizing returns). 81
右图：focus on loss as a measure of risk 3M82
6) Investors will have a diversified portfolio
but may not be efficient from a traditional
finance perspective,因为the portfolio
components are individually justified rather
than considering correlations between
investments. 3M82
5.1 Behaviorally Modified Asset Allocation 3M82
An asset allocation suits the investor’s natural psychological preferences—and it may not be one that maximizes expected return for a given level of risk. 3M83
建立modified portfolio步骤3M83
1)Distinguish between emotional and cognitive biases and to consider investor’s wealth level.
2)The basic actions are to adapt to a bias or to moderate the bias impact.
3)When a bias is adapted to, the resulting portfolio represents an alteration of the rational
portfolio; the alteration responds to the investor’s biases while considering financ ial goals and wealth level.。