Problem:
Which one of the following biases best applies to this situation where one associates A with being better than B?
An article just appeared in a respected journal that attributes behavioral biases to mispricing of different classes of common stock. For instance, the authors suggest that if class B shares of common stock have better voting rights than class A shares of common stock then they should be valued a a premium to class A shares of common stocks; however, they oftentimes trade at a discount. This happens because people tend to associate "A" with being better than "B" even though sometimes "B" represents something better than "A."
Thus, if you own a private company and want to cash out by selling most of the ownership in the company to the public but you do not want to lose your ability to control the firm and want a good price for the firm, then what you should do is sell class A non-voting shares and retain class-B voting shares!
This example of systematic mispricing of classes of common stock provides evidence against efficient markets (where prices reflect all information and pricing is not systematically incorrect). The efficient market theory is the basis of many theories in finance.
a) Loss of aversion (prospect theory)
b) Illusion Control
c) Framing
d) Overconfidence
e) Herding
f) Anchoring and Adjustment
g) Representativeness