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12 Dec 2022

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 ’ 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 fifteen percent invested in ABC.
Gerber initially feels that fifteen percent investment in ABC is high. However, upon review, he decides it is appropriate based on Ludwigs’ involvement and their past
success with similar ventures. Gerber makes a mental note to himself to closely monitor the investment in ABC because he is not familiar with small-cap startup companies.
The remaining 85 percent 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 is able to continue to use his superior knowledge of the healthcare industry.

For the past two years, ABC has been dedicated to Project M, an effort directed at developing a drug for the treatment of 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 over 20 percent 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 also believes that once Project M goes into Phase Two, ABC’s stock price should reach a new 52- week high
of CHF 80.

Soon after deciding to hold the stock, Gerber reads an article by ABC’s chief scientist in which certain scientific results from Project M are detailed. As a conclusion, the
article states: “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. ” While Gerber has difficulty interpreting the scientific results, he feels reassured after reading the concluding statement. Today, ABC announces the news that it will no longer pursue Project M, citing early signs of failure of the project. As a result of the announcement, the stock price drops by 50 percent. Gerber is stunned. He reviews the company’s history and notes that ABC has been up front about its struggles to solve the Project M issues. Gerber now realizes that he has been ignoring all the signs and feels a tremendous regret for not having sold the foundation’s investment in ABC earlier.

1. Discuss how Gerber displayed overconfidence bias and cite one example to support this statement. Distinguish between the availability bias and the over confidence bias. (15 marks)

2. Indicate which bias is illustrated by Gerber’s focus on the achievement of a 52- week high of CHF 80. Discuss how Gerber could have mitigated its impact. (15 marks)

3. Determine whether Gerber displayed confirmation bias when reviewing the chief scientist’s article. Justify your answer with one reason. Answer Question in the template provided below: (15 marks)

Determine whether Gerber displayed confirmation bias when reviewing the chief scientist’s article(circle one)
Justify your answer with one reason
   Agree
   Disagree