Luca Gerber recently became the chief investment officer for the Ludwigs Family Charity, a mid$-$size private foundation in Switzerland. Prior to assuming this role, Gerber was a well$-$known health care industry analyst. The Ludwigs$$s family fortune is primarily the result of entrepreneurship. Gerhard Ludwigs founded ABC Innovations $($ABC$),$ a biotech company dedicated to small cell lung cancer research. The foundation$$s portfolio is $15\%$ invested in ABC.

Gerber initially feels that the $15\%$ investment in ABC is high. Upon review, however, he decides it is appropriate based on the Ludwigs$$s involvement and their past success with similar ventures. Gerber makes a mental note to closely monitor the investment in ABC because he is unfamiliar with small$-$cap start$-$up companies. The remaining $85\%$ of the foundation$$s portfolio is invested in equity of high$-$quality large$-$cap pharmaceutical companies. Gerber deems this allocation appropriate and is excited that he can continue to use his superior knowledge of the health care industry.

For the past two years, ABC has been dedicated to Project M$,$ an effort directed at developing a drug to treat relapses in small cell lung cancer. Project M 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$$ conference calls, ABC$$s CEO was very cautious in discussing expectations for Project M$.$ ABC$$s stock price decreased by more than $20\%$ during the past six months. Gerber believes that the research setbacks are temporary because of ABC$$s past success with projects. He expects that ABC will begin Phase Two within a year, and he also believes that once Project M goes into Phase Two, ABC$$s stock price should reach a new $52-$week high of CHF$80.$

Before making decision whether to hold the stock, Gerber talks with a few researchers in the ABC. They detail certain scientific results from Project M$.$ As a conclusion, they state: $$Although we still have some major obstacles to overcome, the Project M team has seen positive signs that a treatment for small cell lung cancer is achievable.$$ Although Gerber has difficulty interpreting the scientific results, after talking with the researchers, he concludes that Project M has great potential.

Today, ABC announces the news that it will no longer pursue Project M$,$ citing early signs of the project$$s failure. In response to the announcement, the stock price drops by $50\%.$ Gerber is stunned. He decides to keep this stock and even add more positions because he believes that another project N$,$ which is still in phase $1,$ will be successful soon and makeup the loss caused by project M$.$

$14.[4$ points$]$ Gerber$$s assessment of the foundation$$s $100\%$ allocation to biotechnology and pharmaceutical companies is most likely an example of which bias?

A$.$ Na$$ve diversification

B$.$ Home bias

C$.$ Base rate neglect

$15.[4$ points$]$ Gerber$$s belief that the research setbacks were merely temporary given ABC$$s success with past projects is most likely an example of which bias?

A$.$ Availability

B$.$ Mental accounting

C$.$ Conservatism

$16.[4$ points$]$ Gerber$$s approach to interview a few scientists in the Project M team could best be described by exhibiting which behavioral bias?

A$.$ Representativeness

B$.$ Conservatism

C$.$ Overconfidence

$17.[4$ points$]$ Researching the biotechnology industry average probability of success of Phase $2$ trials, particularly those that have experienced delays, is a strategy that Gerber could have used to most likely mitigate which behavioral bias?

A$.$ Conservativeness

B$.$ Representativeness

C$.$ Framing

$18.[4$ points$]$ Gerber$$s decision of keeping ABC stock is most likely an example of which behavioral bias?

A$.$ Gambler$$s fallacy

B$.$ Prospect theory

C$.$ Regret Aversion