Case Study 2: Identifying Behavioral Biases in Investment Decisions
Objective: The goal of this activity is to help you identify different behavioral biases that influence decision-making in financial markets. Work in a group to analyze the case assigned and identify the bias involved.
Assignment Instructions:
- Read the PowerPoints: Read Page 17 to 23 and understand various common behavioural biases.
- Identify the Bias: Read the following cases and identify which behavioral bias is being demonstrated in each case.
- Evaluate the Impact: How does the identified bias affect the individual’s investment decisions? How might it lead to poor investment outcomes?
4. Report: Your report should be concise, structured, and no longer than 4 pages. It must include:
· An analysis of the biases demonstrated in each case.
· A brief discussion on how these biases impact investment decisions and outcomes.
· You may use the attached report template to structure your document.
Case 1: Sarah bought shares in a tech company that have since dropped 25% in value. Despite believing that the company has poor prospects, she refuses to sell the shares, hoping to recover her initial investment. She finds the thought of realizing a loss unbearable, even though selling now would allow her to invest in better opportunities.
Case 2: Mary is interested in buying a used car. She checks the first listing and sees a price of $25,000. After shopping around, she finds another car for $22,000, and despite its condition being worse, she feels that it’s a good deal simply because it is cheaper than the first car she saw.
Case 3: Tom, a professional trader, made a successful investment in renewable energy stocks. He attributes his success to his strong analytical skills. However, when another trade in tech stocks fails, he blames the market volatility, not his own judgment.
Case 4: Jack is a young investor who has been actively trading for two years. After making a few successful stock picks, he starts believing that his success is due to his superior stock-picking skills rather than market conditions. He disregards expert advice and begins trading larger sums of money, confident that he can outperform the market.
Case 5: Emma, a conservative investor, looks at each stock in her portfolio in isolation rather than considering how it fits into her overall investment strategy. As a result, she frequently trades in and out of individual stocks without considering the long-term impact on her overall portfolio performance.
Case 6: John works for a pharmaceutical company and invests a large portion of his retirement savings in the company’s stock because he is familiar with the business. He ignores broader investment opportunities and puts most of his portfolio in this single stock.
Case 7: Rachel has long believed that the automotive industry is doomed because of environmental concerns. Despite new evidence showing the industry’s successful pivot toward electric vehicles, she refuses to change her opinion and continues to avoid investing in automotive stocks.
Case 8: David is looking to invest in a startup. He is drawn to a company because its founder is a charismatic and well-spoken individual with a background in Silicon Valley. He assumes that, like other famous tech entrepreneurs, this founder will lead the company to success, even though the startup’s fundamentals are weak. The company has recently posted disappointing quarterly earnings, but David disregards this new information and still believes in the ability of the founder.
Use of AI Tools
You are permitted to use AI tools to:
· Enhance your understanding of financial concepts and terminology
· Verify or cross-check facts and definitions.
However, AI must NOT be used to:
· Generate the final written report or responses.
· Copy AI-generated content directly into the submission.
· Use AI to bypass personal analysis, critical thinking, or the required research process.
Academic Integrity Reminder:All work submitted must be your own. Misuse of AI, including AI-generated plagiarism, will be subject to academic integrity policies. Proper citations must be provided for any external sources used.
