Module 2

Question 1

behavioral finance

Answer 1

field of study that relates behavioral and cognitive psychology to financial planning and economics in an attempt to understand why people react irrationally during the financial decision making process.

Question 2

cognitive errors

Answer 2

is when decision making is based on well known concepts that may or not be correct.

Often a result of faulty reasoning and typically arise from a lack of understanding of proper statistical analysis techniques, information processing mistakes, faulty reasoning or memory errors.

Question 3

anchoring

Answer 3

involves making irrational decisions based on information that should have no influence on the decisions at hand.

Question 4

illusion of control bias

Answer 4

when clients believe they can control or affect outcomes.

Question 5

money illusion

Answer 5

Is the misunderstanding people have in relating nominal rates or prices with real (inflation adjusted) rates or prices. (think one dollar has the same value today, tomorrow and in the future)

Question 6

confirmation bias

Answer 6

occurs when individual look for new information or distort new information to support an existing view.

Question 7

hindsight bias

Answer 7

is a selected memory of past events, actions or what was known in the past.

Question 8

representativeness

Answer 8

is the tendency when considering choices when making a decision to recall a past experience similar to the present decision making situation and assume one is like the other. (when investors become overly negative about investments that have done poorly in the past and overly positive about investments that have done well in the past)

Question 9

conservatism bias

Answer 9

occurs when individual initially forms a rational view but fail to change that view as new information becomes available.

Question 10

cognitive dissonance

Answer 10

when newly acquired information conflicts with pre-existing understanding, people often experience mental discomfort.

Question 11

framing bias

Answer 11

asserts that people are given a frame of reference, a set of beliefs or values that they use to interpret facts or conditions as they make decisions. Under this concept individuals often choose a guaranteed positive outcome (while avoiding a chance of greater return that also carries the possibility of no gain at all)

Question 12

mental accounting

Answer 12

(also known as money jar mentality) tendency to put money into separate accounts based on the purpose of the money.

Question 13

outcome bias

Answer 13

Is the tendency for individuals to take a course of action based on the outcomes of prior events.

Question 14

self-attribution bias

Answer 14

take credit for their successes and either blame others or external influences for failures.

Question 15

recency bias

Answer 15

Information that is more recent, is considered more important and valuable than less current information.

Question 16

illusion of control bias

Answer 16

when clients believe they can control or affect outcomes when they can’t

Question 17

Open Ended Questions

Answer 17

Requires the client to answer in their own words.

Question 18

emotional bias

Answer 18

stem from feelings, impulses or intuition

Question 19

loss aversion theory

Answer 19

clients fear losses more than they value gains, and prefer avoiding losses to acquiring the same amount in gains.

Question 20

overconfidence

Answer 20

clients believe they can control random events merely by acquiring more knowledge and consider their abilities to be much better than they are.

Question 21

self control bias

Answer 21

occurs when individuals lack self-discipline and favor immediate gratification over long term goals.

Question 22

status quo bias

Answer 22

occurs when comfort with an existing situation leads to an unwillingness to make changes even thought the change is likely to be beneficial.

Question 23

endowment bias

Answer 23

occurs when an asset is felt to be special and more valuable simply because it is already owned. Once an individuals own an asset, they irrationally overvalue them, regardless of the assets actual value.

Question 24

Regret aversion bias

Answer 24

occurs when individuals do nothing out of excess fear that your decisions or actions could be wrong.

Question 25

Affinity bias

Answer 25

refers to the tendency to make decisions based on how individuals believe the outcomes will represent their interests and values. Ethnic, religious, or alumni afflictions can be the source of affinity bias.

Question 26

Risk tolerance

Answer 26

is the trade off that clients are willing to make between potential risks and rewards.

Question 27

Risk perception

Answer 27

is the client’s assessment of the magnitude of the risks being traded off.

Question 28

Risk capacity

Answer 28

is the degree to which a client’s financial resources can cushion risk.

Question 29

Attitudes

Answer 29

reflect a person’s opinions, values and wants.

Question 30

Values

Answer 30

attitudes and beliefs for which a person feels strongly and represent what a person believes to be right.

Question 31

Context

Answer 31

past history or any conditions that presently exist.

Question 32

perception

Answer 32

individuals personal awareness of things, people events or ideas.

Question 33

Judgement

Answer 33

involves making conclusions about what has been perceived.

Question 34

psychological profiles

Answer 34

the unique profile of a client will allow the planner to accurately predict the way the clients will perceive and judge any recommendations.

Question 35

visual learning styles

Answer 35

tend to respond to visual objects, such as graphs, charts, pictures and reading information. Visual learners will express themselves through facial expressions and often have interest such as movies and spectator sports.

Question 36

auditory learning styles

Answer 36

retain information by hearing or speaking. They express themselves through words and often enjoy music and conversation.

Question 37

kinesthetic learning styles

Answer 37

understand concepts better using a hands on approach. For example- writing goals and objectives with bullet points. Kinesthetic learners often express themselves through body language and tend to enjoy physical activities.

Question 38

Financial counseling

Answer 38

a process that helps clients change poor financial behavior through education and guidance.

Question 39

Economic and resource approach

Answer 39

Clients are assumed to be rational and will change to the most favorable behavior if then the appropriate counseling. In this approach, the advisor is the agent of change

Question 40

Classical economics approach

Answer 40

Clients choose among alternatives based on objectively defined cost-benefit and risk return tradeoffs.

Question 41

Strategic management approach

Answer 41

A clients goals and values drive the client planner relationship. Conducting a SWOT analysis is done early in the financial process. The planner services as a consultant.

Question 42

Cognitive behavioral approach

Answer 42

Clients attitudes, beliefs, and values influence their behavior. Planners using this approach attempt to substitute negative beliefs that lead to poor financial decisions with positive attitudes, which should result in better financial results.

Question 43

Psychoanalytic approach

Answer 43

Based on the use of Freudian or Gestalt theory this approach is not widely used by planners.

Question 44

closed-ended questions

Answer 44

questions that require only a yes or a no answer

Question 45

interpersonal cummunication

Answer 45

communicating one on one. it involves understand differences when communicating across generations, cultures, and genders, and will ensure that the listener understands and responds effectively.

Question 46

body language

Answer 46

involves facial expressions, eye contact, gestures and body posture. It impacts how a client receives messages more than any other type of communication.

Question 47

pitch

Answer 47

is the sound quality of highness or lowness of one’s voice.

Question 48

tone

Answer 48

is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm.

Question 49

mirroring

Answer 49

imitating clients gestures, and physical positions or by similar verbal style.

Question 50

emotional intelligence

Answer 50

includes the ability to recognize emotional expressions in themselves and their clients as well as selecting socially appropriate responses to the circumstances and their clients emotions.