Emotional hedging

I got my CAIA exam results last night, and miraculously, I passed. It was the last level, so with this, I have earned the CAIA designation. Before the exam, I vowed that this would be my last paper, regardless of whether I pass or fail. Whew!

After taking the paper, I was actually 70% certain that I would fail. Insufficient preparation was the main reason; I started around ten to twelve weeks before the exam, and as the exam date drew near, I wondered why there was still so much material to cover - I took around the same time for level I and could finish it comfortably. It was only several days later when I dug out my old level I textbooks that I found out why. Level II's textbooks were around twice as thick as level I's!

I came out of the exam hall feeling rather dejected. I had forgotten some important formulae at the last moment, and couldn't do several questions. I thought I didn't do well either for the open-ended portion of the paper, and even left early because I had nothing more to write.

When I spoke to a friend about it, I told her that my passing chance was 30%. She scoffed at me, saying that I 'say that all the time and always pass'. Hey, that's not true! If I were to list down my previous exams' passing estimations and the actual results, that won't be the case. Let's assume that the estimation probabilities are confirm fail, most likely will fail, 50-50, most likely will pass, confirm pass, uncertain.

In chronological order:

Exam	Estimation	Results
CAIA II	Most likely will fail	Pass
CAIA I	Most likely will pass	Pass
CFP Module 6	Uncertain	Pass
CFP Module 3	Most likely will pass	Pass
CFP Module 5	Confirm pass	Pass
CFP Module 2	Confirm pass	Pass
CFP Module 1	Confirm pass	Pass
IOA CT1	Most likely will pass	Pass
CFA III	50-50	Pass
CFA III	Confirm fail	Fail
IOA CT3	Most likely will pass	Pass
CFA II	Most likely will pass	Pass
CFA I	50-50	Pass

So it appears that the recent paper was the biggest discrepancy. Previously it was only passing despite a 50-50 estimation. But honestly, if someone were to ask me about my passing estimation, I would refrain from saying that I would definitely pass. Why? Basic human nature - to manage expectations, to avoid sounding cocky, and to avoid embarrassment. It would certainly be embarrassing if I tell someone that I would definitely pass, and yet I end up failing. I would also sound arrogant and cocky. On the other hand, it is much easier for someone to tell everyone that they expect to fail, even though the paper is not difficult. (I don't do this, by the way.)

Which brings me to my next point - emotional hedging. In the finance world, hedging is an action meant to offset potential losses. In the process, potential gains are given up as well. For example, if you  were to invest in a US bond fund using SGD, you would be exposed to the performance of the underlying bonds, as well as whether the USD appreciates or depreciates relative to the SGD. If the USD appreciates, you gain. If the USD depreciates, you lose. By hedging away currency exposure, it means that you would be relatively unaffected whether the USD goes up or down. In the process, potential losses are offset (if USD depreciates) but potential gains are given up too (if USD appreciates).

Emotional hedging is when you consciously hedge against a negative outcome that is non-financial. I found myself doing it when I thought I would fail. How? By telling a friend that "if I pass, I would treat you to a good meal!". Treating someone, in this case, is a negative outcome, and I have paired it up with the good outcome of passing. And if I fail (negative outcome), I would not need to treat (positive outcome). Of course, this would not be a perfect hedge, as the cost of a simple meal is incomparable to the relief in passing the exam.

So I end up passing, and have to treat my friends to lunch. But who cares? I am more than happy to do so!