Kyle Stewart manages Island Life’s fixed-rate portfolio. Stewart previously managed a fixed income portfolio during a period of rising interest rates. The portfolio experienced large losses that took years to recover.
Global interest rates have ranged from 0.4 to 0.8 times the historical average over the past two years. Based on this information, Stewart forecasts interest rates to rise into a narrow band between 1.15 and 1.20 times the historical average. As a result, Stewart reallocates the fixed-rate portfolio assets to a very short duration relative to the duration of Island Life’s fixed-rate liabilities. The government bond portion of Stewart’s portfolio reflects his longstanding preference to equally weight all G7 countries.
In the months since he first moved to a short duration strategy, market interest rates have consistently decreased. Stewart continues to maintain his interest rate forecast and portfolio strategy. He states:
“The primary objective of Island Life’s fixed income portfolio is to avoid potential interest rate risk. Since our fixed-rate portfolio is currently at only a 5% surplus, a short duration strategy relative to our fixed-rate liabilities is necessary to prevent a shortfall.”
C. Explain how Stewart exhibits each of the following behavioral biases:
- gambler’s fallacy
- naïve diversification
- regret
针对regret，答案给出了两个表现，其中一个是 First, Stewart’s previous bad experience managing fixed income assets in a rising rate environment has undue influence in his selection of a short duration strategy.
我不理解为何这个是regret的表现？我觉得这个表现应该属于representativeness bias，或者是recency bias, 他过去的经历让他得出了规律：利率太低的时候就会上升，而这个规律，事实证明是错的。
而regret-aversion bias的定义是，避免做出决定，怕事后后悔，我没有看出stewart这个行为有避免做决定怕后悔的表现唉。。。
