Case Study:

George Hamilton recently became the chief investment officer for the Johnson Family Charity, a mid-size private foundation based in the United Kingdom. Prior to assuming this role, Hamilton was a well-known health care industry analyst. The Johnsons family fortune is primarily the result of entrepreneurship. Gordon Johnson founded XYZ Innovations (XYZ), a biotech company dedicated to small cell lung cancer research. The foundations portfolio is fifteen percent invested in XYZ. Hamilton initially feels that fifteen percent investment in XYZ is high. However, upon review, he decides it is appropriate based on Johnsons involvement and their past success with similar ventures. Hamilton makes a mental note to himself to closely monitor the investment in XYZ because he is not familiar with small-cap startup companies. The remaining 85 percent of the foundations portfolio is invested in equity of high quality large-cap pharmaceutical companies. Hamilton deems this allocation appropriate and is excited that he is able to continue to use his superior knowledge of the health care industry. For the past two years, XYZ has been dedicated to Project X, an effort directed at developing a drug for the treatment of relapses in small cell lung cancer. Project X has delayed its Phase Two trials twice. Published results from Phase One trials have raised some concerns regarding the drug. In its last two quarterly investors conference calls, XYZs CEO was very cautious in discussing expectations for Project X. XYZs stock price decreased by over 20 percent during the past six months. Hamilton believes that the research setbacks are temporary because of XYZs past success with projects. He expects that XYZ will begin Phase Two within a year, and also believes that once Project X goes into Phase Two, XYZs stock price should reach a new 52- week high of GBP 80. Soon after deciding to hold the stock, Hamilton reads an article by XYZs chief scientist in which certain scientific results from Project X are detailed. As a conclusion, the article states: Although we still have some major obstacles to overcome, the Project X team has seen positive signs that a treatment for small cell lung cancer is achievable. While Hamilton has difficulty interpreting the scientific results, he feels reassured after reading the concluding statement. Today, XYZ announces the news that it will no longer pursue Project X, citing early signs of failure of the project. Because of the announcement, the stock price drops by 50 percent. Hamilton is stunned. He reviews the companys history and notes that XYZ has been up front about its struggles to solve the Project X issues. Hamilton now realizes that he has been ignoring all the signs and feels a tremendous regret for not having sold the foundations investment in XYZ earlier.

1. Discuss how Hamilton displayed availability bias with one example. Determine the implications of availability bias for financial decision-making and describe one way Hamilton could overcome the bias.

2. Discuss how Hamilton displayed overconfidence bias and cite one example to support this statement. Distinguish between the availability bias and the overconfidence bias.

3. Discuss how Hamilton displayed conservatism bias. Cite three examples from the reading.

4. Determine whether Hamilton displayed confirmation bias when reviewing the chief scientists article. Justify your answer with one reason.

5. Indicate which bias is illustrated by Hamiltons focus on the achievement of a 52- week high of GBP 80. Discuss how Gerber could have mitigated its impact.