Certified Financial Management Specialist Practice Exam

Which bias occurs when recent events influence investors' expectations about the future?

1. Predestination Bias

2. Experiential Bias

3. Overconfidence Bias

4. Survivorship Bias

The correct answer is: Experiential Bias

The bias that occurs when recent events influence investors' expectations about the future is known as Experiential Bias. This cognitive bias leads individuals to place greater weight on their recent experiences when evaluating potential outcomes, rather than considering a broader historical context or probabilities. Investors often rely on recent market trends or significant events, such as economic downturns or market rallies, to guide their future investment decisions. As a result, they may overestimate the likelihood of similar occurrences or fail to anticipate market corrections or changes that deviate from recent patterns. This can lead to an inaccurate assessment of risk and reward, ultimately impacting investment strategies and financial outcomes. Understanding Experiential Bias is critical for financial professionals, as it highlights the importance of comprehensive analysis and awareness of the wider historical trends in the market rather than being swayed solely by recent developments.