An equity analyst working for a growth oriented mutual fund has a tendency to misvalue the stocks of popular companies that she has previously recommended and the fund already owns. Her behavior is most likely consistent with which of the following biases?
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A. B. C. D.C
The behavior of the equity analyst, who tends to misvalue the stocks of popular companies that she has previously recommended and the fund already owns, is most likely consistent with Confirmation bias.
Confirmation bias is a type of cognitive bias that occurs when individuals seek out and interpret information in a way that confirms their pre-existing beliefs or hypotheses, while ignoring or downplaying information that contradicts their beliefs. In this case, the analyst's pre-existing belief is that the stocks of popular companies that she has previously recommended and the fund already owns are good investments. Therefore, she may subconsciously interpret the available information in a way that confirms her pre-existing belief, leading to a tendency to misvalue these stocks.
Escalation bias is a tendency to commit more resources to a decision, despite evidence that the decision may be wrong. Prospect theory is a behavioral economics theory that describes how individuals make decisions under uncertainty, based on perceived gains and losses, rather than objective probabilities. Probability bias is a tendency to overestimate the likelihood of rare events and underestimate the likelihood of common events.
Therefore, Confirmation bias is the most likely bias that is consistent with the behavior of the equity analyst described in the question.