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Basic Question 1 of 5

Say one investor was presented with the same mutual fund by two different financial advisors. The first tells the investor that the mutual fund has had an average return of 7% over the past five years. The second advisor tells the investor that the mutual fund has seen above-average returns in the past 10 years but has been declining in recent years. According to ______, even though the investor is presented with the same mutual fund, he or she is more likely to buy the mutual fund from the first advisor, who expressed the rate of return as an overall 7% gain, rather a combination of both high returns and losses.

A. prospect theory
B. over confidence
C. narrow framing

User Contributed Comments 6

User Comment
omf24 Why?
IvanTG This theory states that investors tend to focus on positive information more than negative.
michlam14 i thought the investor focuses more on the negative, because of loss aversion, so they will avoid the choice of portfolio experiencing decline, versus a portfolio that is expressed as having a lower return (but without the info on negative growth)
2014 Investor is focussed on negative information; hence avoided relevant investment
johntan1979 Loss aversion
zriddle Investors would rather avoid a loss than have a gain.
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Learning Outcome Statements

describe behavioral finance and its potential relevance to understanding market anomalies

CFA® 2024 Level I Curriculum, Volume 3, Module 3.