An internal evaluation of the trading behavior of three fund managers of a mutual fund company during the past year has revealed the following:
Manager XWas slower than peers when reacting to changes in informationManager YRarely realized investment losses but realized most of the investment gainsManager ZTended to overreact by disliking losses more than liking comparable gains
Which of the three managers most likely displayed the disposition effect bias?
- Manager Y
- Manager X
- Manager Z
Solution
A is correct. The disposition effect relates to the behavioral bias in which investors tend to avoid realizing losses but, rather, seek to realize gains. Manager Y has displayed this bias.
B is incorrect. Manager X’s behavior of reacting slow to changes is consistent with conservatism.
C is incorrect. Over-reacting, including a dislike for losses more than liking comparable gains, displayed by Manager Z is reflective of a behavioral bias called loss aversion.
