Your client contacts you requesting that you purchase a mutual fund based on a “hot tip” from a friend who has been a successful investor. What bias is your client most likely being affected by?
Comprehensive and Detailed Explanation From Exact Extract:
Overconfidence bias leads investors to overestimate their knowledge or the reliability of information, such as a “hot tip,” prompting them to act without sufficient due diligence. The feedback from the document states:
"Overconfidence is defined generally as unwarranted faith in one’s intuitive reasoning, judgements and cognitive abilities. People tend to overestimate both their predictive abilities as well as the precision of the information they have been given. For example, an investor may get a tip from a wealth advisor or read something on the Internet about an investment opportunity, and then take action (that is, make the decision to invest) based on her perceived knowledge advantage."
[Reference:Chapter 5 – Behavioural FinanceLearning Domain:The Know Your Client Communication Process, ]
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