Alex is from Australia and enjoys talking about investments to their friend Jordan. Alex became an enthusiastic

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Question:

Alex is from Australia and enjoys talking about investments to their friend Jordan. Alex became an enthusiastic investor in Australian equities in 2020, and they would often brag to Jordan about the gains they have made.

One of their conversations goes like this:

Alex: I made 25% on my investments over the last 2 years. I should have started this well before 2020, I could have made so much more money!

Jordan: Now in 2022, I have been seeing a lot of news about recessions and inflation. Are you not worried about investing in only Australian equities?

Alex: No. Australian equities are not as risky as foreign markets.

I think all the doom and gloom in the news is overstated and we are unlikely to see a market downturn.

The last time the RBA increased interest rates was a long time ago.

Australia's inflation rate hasn't been above 3% for several years.

Before the COVID-19 pandemic, Australia hadn't experienced a recession since before I was born!

And the last time we had a recession was in 2020. But that was because of the COVID-19 pandemic and look how well I did during that!

In fact, I just bought shares in CSL. I had to sell some of my existing shares to be able to make the purchase. I currently hold shares in BHP, CBA, and Zip which I bought in 2020 and they have been reasonably stable over the past few weeks. Both BHP and CBA have performed well since 2020, however, I have made a loss on Zip so far. So I sold my some BHP and CBA shares to buy CSL.

Jordan: Why not sell your Zip shares, they have not done very well?

Alex: Because I can use my gains from BHP and CBA to buy the shares in CSL, so they are basically free.

Required

a) With reference to the conversation between Alex and Jordan, identify the behavioural heuristics that Alex displays, if any. Explain your answer.

b) Give reasons as to why behavioural finance is unlikely to be a useful tool for individual traders to outperform the market. Would an understanding of heuristics benefit Alex as an investor?